Interview with AXA Wealth business consultant Martyn Harrison
Regulation, remuneration, opportunity – we asked Martyn Harrison, business consultant at AXA Wealth, for his views on the key business issues affecting the adviser marketplace in 2014.
RK: Apart from compelling the move to fee-based charging what other impacts can we expect from the RDR on advisers’ remuneration patterns?
Martyn Harrison (MH): While the RDR seems to have had less of an impact than many people had anticipated in terms of the transitioning to fees, certainly for the firms we deal with, there are issues yet to be resolved.
Historic client remuneration, i.e. trail commission, is the area where we’ve not yet seen the full impact of the RDR on revenue streams.
Advisers need to concentrate on this; they need to be taking their clients on a journey and repositioning their ongoing services so that when things happen to the contracts as part of the advice process, or if there is a further change in regulation that may impact on this area, they have protected those revenue streams.
We’re seeing more debate around this at the moment in relation to platform regulation, specifically related to the Sunset Clause, which will have an impact on historic revenue streams. Advisers need to understand that impact and work with clients to manage it. They need to be talking to clients now about how in the future there will be a change to revenue streams, and they will have to discuss how the client pays them in a different way.
The one thing advisers need to be aware of is that while the Sunset Clause doesn’t come into effect until 6 April 2016, individual platforms may be moving at a faster rate than that, because these are significant issues and changes to operational processes can’t be done at the last minute.
One of the general messages I give to advisory firms is to make sure they understand the intentions of their platform providers because they may affect the plans and deadlines for their own businesses.
The regulator has spoken about whether there should be an end to pre-RDR trail and that is an issue that is still out there.
RK: How should companies be dealing with the future demise of trail?
MH: If you know that you’re delivering value to your clients then dealing with the issue, making sure clients understand the changes coming through, repositioning your services, is an appropriate way to deal with this.
Also, if you haven’t done it already, get clients to enter into an adviser charging agreement for the ongoing services that currently are being paid for by that particular revenue stream. And do that now rather than leaving it until you are forced to have the conversation.
If there was one message I would give to any advisory firm it is that if they are behind with dealing with the historic ongoing services, then focus on that and pick up the pace in dealing with it.
RK: What other changes are you witnessing in the advice market?
MH: As a general comment on the market, I think it’s true to say that the intermediary marketplace has migrated to the higher-end client that needs a long-term relationship and is prepared to pay for an adviser’s advice and support.
What we’ve seen as a result is the appearance of what’s been called The Advice Gap. Many people who were used to face- to-face advice and used to a particular level of service have now been distanced from that. How that gap is resolved is an interesting question because there is a need for anyone with any level of assets to get some form of advice.
This has lead to the direct to consumer developments in the marketplace offering a solution, either as a standalone proposition or one advisers can incorporate into their business models. These enable advisers to offer a level of service to this group of people where perhaps face-to-face advice isn’t in the client’s best interests or the cost is out of proportion to the benefit they may receive.
The FCA recently launched a review of non-advised and simplified business and is talking to firms that are in that marketplace. We’ll have to see what comes out of the review, whether there is a way forward that would start to make this area more attractive to intermediary firms than it is at the moment.
RK: What level of interest is there among advisers to adopt a D2C revenue stream into their business?
MH: There is a level of interest but it is difficult to know how much at this stage. For any business, if there was an opportunity to serve a market in a slightly different way and to do it profitably, why wouldn’t you look at that?
To some degree it’s going to be driven by the available technology but it has to be something to be considered, the opportunity to grow a different element to your business model.
We know there are very successful businesses in the market already and we know there is predicted high level of growth for the market as well.
RK: What do you see as the business issues advisers should be addressing over the next one to three years?
MH: For SMEs and smaller firms in particular, which I think it’s fair to say is where the majority of the advisory market sits, regulation is going to remain a major factor in what they can do in their businesses.
The advisers we work with seem to be quite happy with the marketplace in which they work, the growth they are experiencing and in general, firms don’t trip over one another. So I think in terms of growing their businesses organically they can most probably see where the potential lies but what will be crucial is understanding the winds of regulatory change.
The good news is, that at least for this year, for the first time in some years, we are not anticipating regulatory change that is going to impact on the structure of the market. To paraphrase Martin Wheatley in a speech he gave in December: 2014 could be a year of consolidation and less exciting from a regulatory perspective than previous years.
That’s not ignoring the platform regulation (PS13/1) that comes in on 6 April 2014, but the market is already aware of its provisions. We’re still thinking through some of the finer detail but many businesses are already responding and making changes to accommodate this.
The main planks of regulatory change have been laid and most advisers have understood the impact and planned accordingly.
So this year maybe advisers can focus on other things, such as the market they are working in, the quality of their client segmentation, the services offered and the charges levied for them. It should be a year where they also start thinking about how they can make their businesses more effective and efficient and where the opportunities for growth are, with a level of comfort that there isn’t going to be a massive market restructuring for them to contend with, certainly in the shorter term.
In a wider regulatory context, there has been some commentary around MiFID II now that we have the draft directive. The review started in 2010 but the earliest the directive will start to be implemented is 2016/17. What will this mean for the RDR in the short-to-medium term is probably nothing at all, and when it does come in, it could be that the directive will still give the FCA room to manoeuvre in terms of adopting the provisions.
When I’m talking to advisers at the moment about what they do need to think about from a regulatory perspective, it is absolutely clear that the UK regulator’s concerns are around three areas, governance, culture and controls in businesses.
For advisers it’s about understanding what’s driving the FCA’s concerns and then looking at processes within the business, looking at the responsibility of approved persons and others and just thinking through what is the governance regime in the business and whether they have adequate controls in place.
The area the FCA seems most concerned about is the cultural issues – what is acceptable within a business and how does the business do things. That’s an area for advisers to give some thought to. Many advisers will have attended business risk workshops where culture is clearly at the top of the agenda. It’s going to be the basis for supervisory activity, whether visits or telephone interviews and questionnaires.
● For further information on AXA Wealth’s adviser support services, go to: www.axawealth.co.uk