Lessons from London

I recently undertook a tour of the financial planning industry in the UK with a group of leading advisers from the Centrepoint Alliance community. The purpose of the tour was to identify emerging trends, best practice in advice and potential technology solutions.

With all the change that has occurred in Australia in recent years it was fascinating to talk to some of the leading advice firms in the UK about the similarities and differences in the evolution of our industries.

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In some respects Australia has led the way. In other areas I think there are lessons for our future here.

What we did get a sense of, because they had a more sudden withdrawal of investment commissions, is that the UK financial planning market has moved to a clearer advice model compared to Australia.

At the end of 2012, UK advisers suddenly ceased to receive remuneration from investment-related products. The same thing happened in Australia when FOFA came into play, but we were able to grandfather many of the pre-existing client arrangements which, for a lot of advice firms, effectively runs off over many years. So we didn’t have the immediate urgency to change the way advice firms operated.

In the UK this change has led to a dramatic drop in the number of advisers, to the extent that today the UK has only 22,000 advisers, very similar to the number registered with ASIC in Australia.

As a result, many UK advisers recognised they were remunerated for their advice and not for the substantial time and resources they allocated to investment related activities. This has resulted in a growing investment outsourcing sector that specialises in undertaking the work previously done by many advisers and licensees related to portfolio construction, investment implementation and administration, and client communication.

For many UK firms, these investment-related activities are now outsourced to discretionary fund managers or licensee dealer groups setting up an investment capability. Advisers basically say “we will give you the client objectives, cashflows and risk profile, you please develop and manage an investment strategy for that person”.

So the advisers have really moved to a client-centred advice model concentrating on cashflow management, estate planning, strategic investment allocations, risk profiling, tax advice and general guidance.

Because of aggregation benefits at the asset manager or platform level, the client is only paying anywhere between 10 bps to 35 bps additionally for that investment service. The adviser no longer spends the time and resources on it and the client gets a more professional managed investment strategy.

Using this model, advisers have actually been able to maintain or, in some cases, increase their fees because they are spending time and energy on what the client is prepared to pay them for – pure financial advice around their life situation, structuring their finances and helping them achieve their goals.

We also found that UK advisers are typically charging an advice fee of 1 per cent of the client funds under management with a minimum fee, whereas over here a lot of advisers are still striving for that.

They are able to do this because they have gone further down the route to pure financial advice and can justify the 1 per cent fee from tax savings, better cashflow outcomes and savings habits, and spend more quality time with the client on presentations and communication.

Unlike Australia they hadn’t ventured down the route of flat fees to the same extent, which is more truly reflective of an advice model and also de-risks the adviser from a downturn in markets.

Another finding is that the UK firms are using a lot of Australian technology for wraps, master trusts, managed accounts and Xplan – they see us as being ahead of them in IT.

However, they are still struggling with the same issues as Australia around integrating different technologies, cashflow analysis and holistic advice, and there is a lot of investment going in to try and solve this.

Robo-advice isn’t working over there yet but they are still optimistic that it is going to improve the efficiency of advice. A few large firms are working on ‘version 3.0’, which provides a complex needs analysis and advice recommendation that can be used by the client or in conjunction with an adviser. They are also expecting the large tech firms to enter the market with more client-centric tools that do tax returns, bill payments, cashflow reporting, asset and liability reporting, advice and execution all in one.

One of the other things that is quite topical is the UK government review into financial advice – the Financial Advice Market Review (FAMR). This looks at how to solve the UK’s advice gap under the current regulatory environment and make advice more accessible to more UK households. As a result, the FCA – the UK regulator – is under pressure to try and open up and lower the cost of advice. They have become very supportive of corporatised models and robo-advice, which can provide large scale forms of advice at a reasonable cost. They are also looking at streamlined advice (similar to our scaled advice) or no advice solutions to make it easier for people to access education and basic guidance at a lower cost without imposing the legal responsibility of giving advice.

We met with the regulator and they were quite in tune with the market. They understood what advisers and licensees were dealing with, and provided there was good intent to solve the problems in clients’ best interests, they were open to new models and even prepared to provide pre-approval and sign-off on an advice process.

The focus of many independent advice firms has been on buying existing client books rather than acquiring new ones because of the high cost of putting on a new client. Advisers have also moved towards restricted advice where they only have a limited APL because the cost of reviewing the whole market was too high. This has driven up the value of existing books of business.

So there is currently a strong positive feeling that due to the findings of FAMR the regulator is serious about helping the advice industry come up with solutions to provide broader community access to advice in a more cost-effective manner.

All in all, the study tour was a great investment for all of us. It showed that a real client-centred advice model can work, and that we are not alone in dealing with the difficult issues of technology integration, robo-advice and overly restrictive regulation.

ifa sister title Adviser Innovation will be operating a delegation of financial advice thought leaders to the UK in late 2017. Contact editor@ifa.com.au for details.

John de Zwart is the chief executive of Centrepoint Alliance