Independent financial advisors face unprecedented change from 2012. Here’s why the travel industry should watch closely
The travel industry has enough on its plate already, so the thought of empathising with an IFA might not sound terribly compelling. But the financial advisory sector is about to be hit by massive changes (largely through government-imposed reforms) that I think will echo throughout the travel sector.
In 2012 a new regime comes in, defined by something called the Retail Distribution Review or RDR. This dictates that advisers must be completely transparent with their clients concerning their charging structure, and that they cannot make money based on backhand charges via commission – charges must be agreed up front with the client.
Crucially, regulators are forcing through a wave of professionalisation, requiring advisers to sit endless exams to prove their competence. They are also increasing the pace of micro-management of product channels and selling techniques – they’re demanding that advisers disclose their research channels, prove their knowledge and properly explain all the risks.
All of this is set to trigger a range of structural changes in the sector. The independent operator is being squeezed by a number of different competitors, all much bigger. The deadliest threat comes from the big high street banks, who are busily rebuilding their broken brands – in the new world it’s all about centrally sourced product, funneled down sales-based channels. Some banks will only sell their own products while others adopt a more open architecture. Sadly whatever the structure of delivery, the end product is usually far inferior.
The next set of competitors cater to the mass affluent and the high net worths. Discretionary stockbrokers and private banks pedal polished images and ‘bespoke’ advice for either a fat hourly fee or a percentage charge for investments under management.
With the bottom end of the market under attack from the big retail networks and the top end from the discrete wealth crowd, the middle market looks increasingly like a nasty, brutish place. Many independents are coming together to pool their resources within networks, which are increasingly turning into franchised operations.
Some advisers will make a go of the new charging model but for most a grim reality awaits after 2012 – their income levels will fall substantially from around £100,000 per annum gross to around £50,000 or even less.
Countless thousands of advisers are likely to exit the industry, and those that remain will be much less independent and increasingly likely to revolt against the onerous regulations imposed on them. Some will abandon individual advice altogether and become ‘super-introducers’ who outsource all the actual services to other specialists.
Others will move up the value chain and re-orientate their product set towards the high net worth sector. But all will be under massive strain as compliance-based reforms collide with mass market commodisation and lower margins.
Many in the travel industry will recognise this concept: commoditisation of personal advice, the threat of lower margins and a massive haemorrhaging of specialist skills. The squeezing of those in the middle will also be wearily familiar.
The issues facing ‘personal advice’ are similar. Financial products like pensions and ISAs involve large spending decisions, and they require specialist help. But the margins post-RDR can’t really justify the time of a specialised adviser – the margins will be too thin for good, solid independent advice.
Customers will react by using DIY methods – going online and assembling their own product sets. Upmarket operators can afford to offer more advice and the veneer of discrete, bespoke service but in reality they also struggle to make a decent margin.
There are of course some important differences with the travel industry. The starting salaries for IFAs are higher, and the level of professional expertise required is arguably greater. Most importantly, the financial services sector is subject to a compliance regime that is not (yet) present in travel.
But I’d draw attention to three key developments in the financial services sector that I think are hugely relevant to the travel industry.
The first is what I call the holy grail of all complex products. Many financial services companies know that the future is direct distribution – using the internet to package and sell product. But they also know that a complex product range actually engenders confusion and inertia in many clients.
The killer business proposition for both financial advice and travel will be a website that combines great products at low cost with a brilliant content-driven front end that guides the customer through a complex decision-making process.
The next key development is the rise of new advisory and revenue models. In the future many financial advisers will make no money from commission and never buy a product for the customer or manage their funds. The adviser will simply make a charge for hours worked and hand their recommendations to the client.
A next-generation IFA might give hundreds of these two-to-three hour consultations at around £500 a time, with one consultation every few years for each client.
A high-end model is also emerging. For wealthier clients the adviser will agree a flat fee (as a percentage of spend) which involves decoupling the income streams from actual products. If you have £1 million to invest, your manager may make a charge of 0.50% per annum (£5000 per annum) and they’ll advise across a massive range of products with which they have no commercial relationship.
This model emphasises research, strong opinions on the best products, and advisory networks bearing down on product providers to lower their costs via bulk-buying.
The last development is the most counter-intuitive for those in the travel industry: regulation and governmental interference. Clearly there are some very major regulatory differences between a travel product and a financial product. But consumers spend a large proportion of their income on a holiday and travel products are complex.
More to the point, the frequent collapse of operators and the centralisation of retail networks into a few dominant companies (especially after the Thomas Cook and Co-op deal) must be beginning to raise questions in the minds of those in government. Should the ‘point of sale’ part of the customer experience not be subject to far more scrupulous regulation?
And won’t that pressure to regulate increase as more and more financial products are sold through the high street travel shop? Already the big networks are making decent profits out of their insurance and FX products – maybe in the future, new products will emerge based around credit cards, loyalty cards and new forms of insurance.
These financial products will all be sold at the frontline and they will almost certainly be higher margin. Those higher margins will attract the attention of the regulators, who will want to know that the very best advice is being offered.
And when the regulators start interfering in the advice process, you’re only one step away from the IFA’s current precarious state. Cue a hellish world of micro-regulation, endless exams and red tape.
The net result, I fear, will be lower incomes and an exodus of skilled professionals fleeing a harsh business environment.