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Created on Monday, 15 August 2011 00:00

There has been a mixed response from advisers following The Treasury Select Committee’s report on the Retail Distribution Review (RDR).  But no matter how they have responded, most adviser businesses are faced with the clear fact that they need to change the way they interact with their clients and at the heart of that is their business model.  One area that has been highlighted as an area for concern is the issue of cash flow management.

Advisers are so focused on providing the best advice and solutions for their clients that often their own business models can be left at the bottom of the ‘to do’ list.  With the implementation of RDR in 2013, it is no longer an option to sit back and consider the options for the business.  Action is needed and in a timely manner to ensure that changes can be adopted at all levels of the business.

For those firms looking to successfully adapt to the post RDR world there are several courses of action that can be considered. Firstly, it is vital to consider the financial challenge of the RDR within the overall process of evaluating and redefining the firm’s business model. To achieve this, many smaller adviser firms will find that specialist consultants can add real value to this process across a variety of areas, from the basics of RDR training, through to the selection of a technology platform and the marketing of an RDR compliant brand at the conclusion of the project.

One of the first steps that advisers should take is to work together with accounting support to model the likely impact of RDR on the cash flow within their business. One issue is that setting aside enough time to achieve Diploma or Chartered status takes time out from being on the front line advising clients. All told, the bill can range from £6,000 - £10,000 per adviser in lost chargeable client facing time and in additional training costs. These costs have been looked at with some care by the FSA in the aggregate and reported on in their successive RDR Consultation Papers. For example, CP10/14 estimates an industry wide cost of £210m.

These costs can be material to an adviser firm and draw attention to the task of sharpening up the business model and streamlining internal processes. The crucial consideration is how to leverage available time most effectively.

An obvious target area for re-analysis is the time spent on researching funds and altering allocations, as the process of obtaining client agreement to investment switches is both time intensive and compliance critical. This therefore places a practical limit on the number of clients that can be looked after by each individual adviser and thus, the firm.

On top of this, the market instability of the last two years has drawn attention to the opacity of many of the issues around investment management and has made it logical for the regulator to expect higher standards of expertise and professionalism of those individuals involved in choosing the funds or investment solutions for clients.  It is important under RDR that advisers now place a heavy focus on the consistency of the services being offered to their clients. In a number of firms, substantial amounts of time are spent on the research for complicated cases such as home income plans, group schemes and offshore pensions.  Very often, despite hours of detailed analysis and research these plans do not end up being converted for the client and all the adviser has to show for the work done is a polite expression of thanks - not the solid foundations of a good business model.

In order to meet the challenge of providing profitable high quality advice to clients, adviser firms will need to develop a robust segmentation approach.  An approach based around building the firm’s capacity to see more clients but still ensuring best advice is given.  To do this the firm needs to offer a more streamlined service, based on what their advisers are most capable of delivering.

Having undertaken this segmentation analysis, an adviser firm can then use a low cost, online discretionary investment service to provide bespoke solutions to suit the needs of specific segments of their client base.  This approach automatically builds in an annual adviser charge of between £200 - £750 per annum, per client.

For those adviser firms that have previously been commission led, an adviser can typically convert a total of £6m of investments held in a variety of third party wrappers, held across a number of different funds, into a range of carefully constructed risk graded portfolios, managed through a combination of active and passive funds at a very attractive total expense ratio (TER). The advice fees will be paid by clients on their instructions from the income on their portfolios, which will enable advisers to generate a valuable source of annual income.

Increasingly advisers are turning to discretionary fund management solutions for their clients.  This type of investment proposition enhanced by the creation of their own defined investment methodology, can recover higher value investment relationships historically outsourced to less cost efficient DFMs.  The result is a more secure client base, with consistency of approach regarding the investment proposition.

The last area that an adviser firm in the transition phase should consider is that of a business evaluation. With a growing fund base and a repeatable advice process, and, now, recurrent revenue, the fully transitioned advisory firm might be worth significantly more per adviser and this will be a growing figure. With a sound business process and a focus on profit, there is the basis to attract talent to the firm, to allow an owner manager to retain ownership, maintain involvement and consider their own future, with more flexibility.