Are you about to lose your financial adviser?

21st April 2009

If you currently have a financial adviser, their professional life may be about to change beyond recognition.  Over the next couple of years we are due to witness a major regulatory shake up in retail financial services. 

Many of these proposed changes will place a great deal of pressure on the traditional financial adviser.  With the average age of an IFA in the UK often claimed to be in the mid-50’s, many advisers are now weighing up their options and in some cases considering a dignified exit from the profession before the changes hit home.

But what are these changes that are set to have some a significant impact on the way your financial adviser does business in the future?  Fundamentally they cover three different areas – remuneration, qualifications and capital requirements.

1 – Remuneration

The old way of working was for a financial adviser to be paid out of commissions whenever they sold a financial product.  This meant they could meet with clients and provide recommendations effectively without cost or obligation.  It was only when the recommendation was accepted and a product was implemented that the commission was generated. 

Commissions have to be disclosed, but many claim they are potentially unfair because they can be opaque and can sometimes influence the impartiality of an adviser, even if that adviser is ‘independent’ in terms of product selection.

A more professional way of working is perhaps for the financial adviser to agree a specific fee for their advice, implementation and review services ahead of doing any work for the client.  These fees can still be paid out of product or investment charges, so nothing changes in that respect, but the overall charging structure is more transparent and removes much of the cross-subsidy associated with the commission model.  It may also remove any perceived pressure on the part of the adviser to always recommend a product solution.

The new regulatory proposals within the Retail Distribution Implementation Programme mean that every financial adviser will need to stop working on the commission basis and start working on an explicit fee basis by the end of 2012. 

For many advisers this is a step too far as they have spent their entire careers receiving commissions for selling financial products.  It requires a huge mindset change to move from commissions to fees, as well as the ability to properly articulate the value of your proposition to your client. 

2 – Qualifications

Under the current regulatory regime, the qualification requirements for financial advisers are pretty basic.  The mandatory examination modules you need to pass before you can be an ‘approved person’ to deliver financial advice are broadly equivalent to a tough GCSE or easy A Level. 

Calls for a more stringent assessment of adviser competence have been around for years, and the new regulatory proposals are due to introduce new requirements for adviser exams.  The new mandatory minimum standard will be equivalent to the old Advanced Financial Planning Certificate or what is now called the Diploma in Financial Planning. 

This is a big step up for advisers who currently only hold the basic minimum qualifications.  Many have been fighting these proposals because they fail to see the value in examinations or having their competence to provide advice tested.

For new entrants, the new mandatory examination standards are due to come into force in 2010.  For all current financial advisers they only have until the end of 2012 to complete their studies and get the additional professional qualifications required.

If your adviser is still at the Certificate in Financial Planning level and has not been taking exams to progress towards the Diploma, they are already running out of time to reach the new qualification standard.  This is possibly one of the clearest indications that they are not committed to being a financial adviser once the new rules have been introduced.

3 – Capital requirements

Another regulatory requirement that looks set to be introduced in 2012 if the need for financial adviser firms to hold higher levels of cash or equivalent liquid assets in their business.  This is already a regulatory requirement, but the proposals aim to increase the minimum capital requirement from £10,000 to three month’s committed expenditure. 

The actual numbers will depend on the firm involved, but for a small IFA practice with £200,000 of costs, this could mean a five-fold increase in their capital adequacy requirements.

Clearly for the Financial Services Authority there is a perceived benefit in regulating firms that are financially secure and unlikely to go out of business.  We have all seen the trouble faced recently by the banks when some of them became technically insolvent and needed to be bailed out by the government.

It is the combined impact of these three factors, all happening in a relatively short space of time, which will mean some financial advisers choose to retire rather than make the changes required within their businesses to continue.  We expect a large number of the more traditional financial adviser firms to leave the profession as a result of these changes, leaving their clients in a difficult position.

Some firms will undoubtedly be sold on to other firms that do plan to continue.  This will mean a change in adviser and management team.  Remember that you are under no obligation to stay with your financial adviser. 

If after reading this article you decide that the writing is on the wall for your current adviser, you might choose to be proactive now and look for an adviser that already satisfies the new regulatory requirements with whom you can build a long term business relationship.

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are you about to lose your financial adviser?