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Contingency planning for you and your clients

Putting a contingency plan in place that looks to provide certainty, flexibility and continuity for both you and your clients makes sense, says Brian Raven, chief executive, Tavistock Investments

We all think we are going to work until we drop when we do something we love. However there inevitably comes a time when we need to start thinking in practical terms about winding down our professional lives, changing their make-up to give us more flexibility, or at least having some sort of contingency plan in case circumstances dictate that we cannot continue to work at full tilt.

For financial advisers, many predictions of doom and gloom based on some sort of post RDR Armageddon have proved to be inaccurate. Looking at APFA figures, the number of advisers has remained remarkably stable.

Tavistock - Total IFAs dec 2014

FCA sector statistics for retail intermediary firms, 2012, and aggregated FCAs RMAR data, 2013 and 2014. Defined as all firms that conduct financial advice as their main regulated activity. It does not include firms that conduct some financial advice but not as their main regulated activity. All reference to the number of firms in the report is from this data. Source: APFA

You will not, therefore, find me making similar predictions based on the impending sunset on commission in 2016.

However, good planning is good planning, and it seems financial advisers are often their own worst enemy on that score. A survey Tavistock Investments conducted earlier this year showed that nearly half of advisers had failed to regularly review their contingency plan for looking after their clients in the event that something happened to them, even though the vast majority (92%) acknowledged it was a good idea to do so.

The problem, as the APFA figures show, is that the average number of registered individuals in an advice firm is only 1.6 (4.5 for directly authorised firms). Therefore the vast majority of advisory businesses are very small, which does not leave them with much flexibility if and when planners become incapacitated or decide to retire. After all, there is a limit to the number of additional clients a financial adviser can take on from a colleague or even cover on a temporary basis without detriment to the quality of service they are able to provide.

Surely it is part of treating customers fairly to ensure that clients’ future financial planning needs will be met effectively. On top of that, like the rest of us, clients generally don’t like change. A significant proportion of clients will themselves be coming up to, easing into or already fully in retirement. Much of their financial planning needs at this time centre on providing them with some certainty about what their life will be like in the future as they begin to rely increasingly on accumulated wealth and less on earned income.  Knowing that their needs will be met as they grow older is a key concern for both clients and their advisers.

It is little wonder then that in our survey, over two thirds of respondents said that they were concerned or very concerned about how well their clients will be looked after once they retire.

Advisers have a right to think about themselves too

However, while their first duty is to clients, financial planners are also entitled to be a little selfish. Having some guarantee about what their own retirement will look like, I believe, would be of significant benefit to the vast majority. This was certainly borne out by over 70% of respondents who said that having some sort of guaranteed retirement contract in place to realise capital from the sale of the business would be of interest.

As excellent planning isn’t just about securing some capital value from a business, it is also about a duty of care to clients, advisers should look for options that offer the best mix of certainty, flexibility and continuity for their clients in sourcing their own retirement solution.

Part of that process should include a focus on the robustness of the investment propositions provided by any firm that they may consider selling their business to. Looking at some recent studies on the way that investment propositions are evolving, it is clear that financial planners are moving away from attempting to construct portfolios of single asset class funds, towards multi-asset funds or model portfolios (either run in house or outsourced to DFMs). Such approaches offer a rather more robust response to a client’s needs in terms of attitude to risk and capacity for loss, as well as their understanding of, and comfort with, the investment solution being offered.

There is a real need for financial planners to look under the bonnet of what is on offer and a responsibility to ensure that their clients aren’t going to suffer the impact of old-style investment products with bid/offer spreads and exit penalties, or a lack of competition and choice at every risk rating.

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