to the brochure - The Institute of Financial Planning

For Professional Investors Only - Not Intended For Use By RETAIL Investors
Client suitability:
Do you know what your client
needs from the service you provide?
Insights from Aberdeen’s
Adviser Intelligence Series
Spring 2012
www.aberdeen-asset.co.uk/adviserintelligence
Contributors
Clive Waller, Managing Director, CWC Research
Clive held positions in sales and marketing for over 25 years with Scottish Amicable and Zurich
Insurance. He was Investment Sales Manager and Sales Director at Zurich Life and Group Director
at ZIFA. He became Managing Partner of the Training Design Studio in 1999, writing and delivering
training programmes on taxation, pensions and investment. At the same time, he set up the
specialised research-based consultancy, CWC Research, to provide data and advice to fund
managers, platforms, insurers and specialist consultancies.
Phil Billingham, Head of Business Consultancy, threesixty
Phil is a specialist in assisting financial advisers and planning firms survive and thrive during periods
of regulatory change. He has worked with advisers, planners and regulators, spoken at
conferences, and been published in the UK, Isle of Man, USA, South Africa, Australia, Jersey,
Guernsey, Gibraltar and Eire. Phil is a Certified Financial Planner (CFP) and a Chartered Financial
Planner, and is a Director of the IFP.
Paul Resnik, Co-founder and Director, FinaMetrica
FinaMetrica was co-founded by Paul Resnik in 1998 to assist financial advisers and investment
managers better match investments to the needs of investors. Having successfully established
financial planning, funds management and life insurance businesses for Norwich Union and
Bankers Trust in Australia, Paul has developed an intimate understanding of the manufacturing/
distribution supply chain. He brings more than 40 years of practical experience in financial services
to show how treating customers with respect invariably leads to greater client satisfaction,
enhanced compliance and increased persistency. FinaMetrica services 3,000 plus subscribers in 17
countries and has completed near 500,000 profiles through three market corrections.
Robert Reid, Director of Syndaxi Financial Planning, the Ideas Lab
Robert Reid APFS CFPcm Chartered Financial Planner; is a Director of The Ideas Lab Ltd, a
consultancy focused on business change, the RDR in particular. He is also a Director of Syndaxi
Financial Planning; a fee based firm of Chartered Financial Planners based in the heart of the City of
London. Robert entered the financial services sector in 1976. He is a past President of the Personal
Finance Society and the Chairman of Practitioners Advice Committee – European Financial
Planning Association. He is currently a Vice President of the CII. Robert is an Associate of the
Chartered Insurance Institute (ACII); an Associate of The Personal Finance Society (APFS), a
Certified Financial Planner (CFP); a Chartered Financial Planner and an Accredited Adviser with
Resolution all by examination.
Malcolm Kerr, Executive Director EMEIA Financial Services, Ernst & Young
Malcolm Kerr is a director within Ernst & Young’s UK Financial Services division providing advice to
the key providers in the life, pensions and retail investment markets and to major intermediaries.
Before moving into professional services some 12 years ago, Malcolm held a number of senior
executive and board positions in the industry including IFA director at Canada Life(UK), vicepresident of MetLife (US) and chairman of Albany International (IOM). Ernst & Young is a global
leader in assurance, tax, transaction and advisory services with 150,000 staff worldwide.
Introduction
Steve Andrews, Head of Strategic Partnerships,
Aberdeen
As they transition their businesses in preparation for the
RDR and beyond, advisers face a bewildering array of
choices: Which platform is most appropriate? Which
risk-management tools do I need? Will cash flow
modelling benefit my clients?
Aberdeen’s Adviser Intelligence Series has been devised
to help advisers negotiate these choices and make the
best long-term decisions for their businesses. We aim to
bring together some of the top speakers in order to
address the most pressing topics as advisers enter this
final stage of transition.
With guidance from the Institute of Financial Planning,
in the latest Adviser Intelligence Series we have
combined some of the leading research providers –
including Clive Waller of CWC Research and Malcolm
Kerr of Ernst & Young – with some of the leading
strategic thinkers – such as Phil Billingham of threesixty
and Robert Reid of the Ideas Lab. We also have experts
in individual fields. In this series Paul Resnik of
FinaMetrica guides us through the thorny subject of
risk profiling. It is a programme designed to help
advisers build sustainable and profitable businesses
for the future.
For more information on Aberdeen’s Adviser Intelligence
Series, please visit
www.aberdeen-asset.co.uk/adviserintelligence
In association with
Contents
Preparing for RDR - Clive Waller
02
Are you working on a model which works for you, or one that will delight your clients and the regulator and have you
stress tested this? With less than a year to go to the implementation of RDR, Clive explores how many advisers have a
clear client proposition, a fee schedule, a list of what their clients will be paying for and what the regulator is looking for.
10 questions you need to ask about your RDR-readiness
04
Client Suitability – Phil Billingham
05
Phil provides key insights into establishing and checking the level of investment risk that retail customers are willing and
able to take.
Investment Suitability – Paul Resnik
06
Paul discusses the benefits and risks of risk profiling tools in context with what the FSA is really asking of advisers. Paul
aims to answer the common questions relating to risk profiling, do it yourself, outsource or use a discretionary fund
manager?
Why cash flow modelling makes life safer for all – Robert Reid
08
Robert looks at the value of cash flow modelling by breaking down the component parts of the client proposition and
putting the client first.
Macro trends for adviser businesses approaching RDR: A Q & A with Malcolm Kerr
09
Based on recent research conducted by Ernst & Young, Malcolm examines macro trends that advisers are facing in the
lead up to the RDR
In conclusion
10
www.aberdeen-asset.co.uk/adviserintelligence
01
Preparing for the RDR
Does your model work for you, your client and the regulator?
The experts suggest that the restricted route may give
advisers the best blend of risk and reward. However,
most advisers believe there is value in independence. In
this, there is a disparity between the management of IFA
firms, who believe restricted may be the answer, and
most IFAs who want to stay independent.
Clive Waller, Managing Director, CWC Research
With less than a year to go to RDR, our
research with advisers looked at some
important aspects of RDR-readiness, such
as the development of a client proposition,
independence, fee charging and regulation.
With this in mind, I would like to pose a
number of questions on preparing for the
RDR: Who wants to be an independent
financial adviser? And, are advisers going
to be chartered accountants or turf
accountants in future?
Who wants to be independent?
When RDR started, the regulator expected everyone to
stay independent. In its view there was no reason to
multi-tie and the concept of ‘whole of market restricted’
has not appeared anywhere in its discussion papers.
In order to use the tag ‘independent’, we expect that
firms will need to be able to provide advice on all types
of retail investment products (including those from
overseas, if necessary). Yet the majority still don’t know
how they will look at areas that they don’t currently
recommend, and are unlikely ever to recommend.
Chartered accountant or turf accountant?
This is really asking what it takes to be a professional.
Advisers need a 25-word customer proposition that can
be delivered on the golf course, or in a wine bar, that
gets a client to bite very quickly. This was an area of
weakness, according to the research. The answers
weren’t that compelling. For example, ‘fee-based whole
market financial advice with outsourced investment
services’?
Perhaps the most important area is to ask what clients
value. For example, does a client value an adviser making
three hour round-trip to see them twice a year,
particularly if they are going to get charged a hefty fee
for it?
A previous JP Morgan survey found that tax-efficient
planning is the subject most in demand. While
consumers appear keen to find an expert who can review
all their existing affairs, they appear less keen to pay a
third-party adviser to manage their investments for
them on an ongoing basis.
A fee-based proposition –
what is the regulator looking for?
1. A customer proposition
2. A fee proposition
3. A menu of charges
4. Evidence that work is carried out
5. Evidence that quality is satisfactory
6. And TCF
02
Adviser Intelligence
But the future is bright
We live in an increasingly complex financial world, for
which people need a guide. Ernst & Young has previously
predicted that the RDR will see adviser numbers drop
from 30,000 to 20,000. This is a good thing. Those who
leave are the old-fashioned transactional advisers that
no longer have a place in the market.
The IFS predicts that as many as 3.5 million people may
be sucked in to the 40% tax band over the next few
years. The baby boomers are starting to retire and are
going to need advice. There are likely to be less welfare
and pension benefits and less qualified advisers to help
people negotiate their retirement. Most advisers remain
confident, but they will need to retain momentum.
“90% think they will
remain IFAs; 10% will; this
will cause tension”
– IFA consolidator.
“We expect 80% to be
restricted; 90% expect to
be independent”
– large network director.
“We will be both IFA and
restricted in some form”
– National IFA.
Quotes from CWC Research’s latest paper
entitled “The Kings New Clothes”
www.aberdeen-asset.co.uk/adviserintelligence
03
10 questions you need to ask about your
RDR-readiness
1. Have you asked your clients what they would like?
Client research has been a neglected area of RDR preparation, according to Malcolm Kerr of Ernst & Young.
Engaging clients in the process early on can reap rewards further down the line.
2.Do you have a clear client proposition?
Advisers need a 25-word customer proposition that can be delivered on the golf course. It should be capable
of getting clients interested and engaged with your business very quickly, according to Clive Waller of
CWC Research.
3. Have you adjusted your thinking?
Advisers need to shift from selling the products of fund management and insurance companies to selling
themselves and their planning and advice skills. Many have not yet made that leap.
4.Are you wedded to independence?
Surveys suggest that being restricted may be a more efficient model and that business owners are comfortable
with the restricted concept. However, advisers themselves still value independence.
5.If you are going to remain independent, have you decided how will you assess areas that
you don’t currently recommend, and are unlikely ever to recommend?
This is required under the current FSA definition of independence.
6. How many of your clients have signed fee agreements?
Research for Aberdeen’s Adviser Intelligence programme suggests many advisers calling themselves RDR-ready
still do not have signed fee agreements in place for the majority of their clients.
7.Is your risk management process robust?
The risk management process has to be consistent across a firm and across clients. That said, it does not need
to be a piece of irritating bureaucracy. It can help you understand your clients better and form a strong basis
for discussion.
8.Do you have a cash flow modelling
process in place?
Research suggests that this can add significantly to
the value provided for clients and their engagement
in their financial affairs.
9.Are you clear where your value lies?
The majority of clients value holistic financial
planning above the management of an investment
portfolio. With unbundling creating downward
pressure on fees, advisers need to be prepared to
defend their part of the pie robustly.
10.Does your platform enable independence?
Will you have to go off-platform in order to
recommend certain products? Or can your
platform be upgraded?
04
Adviser Intelligence
Client Suitability
How do we establish and check the level of investment risk that retail customers are willing and able to take?
Phil Billingham, Head of Business Consultancy, threesixty
The short hand, understood view of risk and
reward is a straight line relationship. Take
more risk, get more reward. Yet that has not
been the client’s experience. There comes a
point where the potential for loss is 100% in
return for only a small amount of potential
gain. Clients hate losses far more than they
love gains. When markets are down 30%,
and an investor is only down 20%, they
generally do not thank their adviser for
saving them 10%. If, on the other hand, an
adviser makes them 8% when the market is
up 5%, they are not as commensurately
happy as they were unhappy when they lost
money. It’s not a great situation.
The investment world has become significantly more
complex. There is a wider use of alternative jurisdictions
and a wider use of ‘financial engineering’ and alternative
funds, which introduces elements such as gearing and
counterparty risk. Equally, many investors have also
embraced the use of wraps and platforms, which provide
access to thousands of funds. This means advisers have
an important new role in defending clients against bad
investments.
Risk profiling is about much more than volatility. There
are lots of different types of risk – systemic risk, market
risk, moral risk, etc. Advisers have previously been guilty
of operating at a client’s risk tolerance. This is equivalent
to holding their hands to the fire and matching it to the
point at which they say ‘ouch’. A better approach is to
look at how much risk a client needs to take to achieve
their goals. Mapping and consistency are also important
– particularly across any outsourced or discretionary
fund management process.
An adviser needs to establish with their client the risk
required, the risk perceived, the risk capacity and the risk
tolerance and understand the difference between them
all. They also need to understand which of those are
stable and which are not. Most complaints are about
miscommunication of risk. Advisers have to become
much clearer about how they talk about risk.
Due diligence needs to be done on products, funds,
software, risk profiling and asset allocation tools. There
are plenty of traps. Advisers need to understand that
they are responsible for the advice, including the due
diligence and suitability. There have been a series of
failures from the ‘manufacturing’ part of the industry
and there are likely to be more. Advisers need to
remember not to recommend anything they don’t
understand or seek complicated solutions to simple
problems.
What do you believe about managing money?
1. Are you a fund picker or asset allocator?
2. Tactical or strategic?
3. Ethical/green/targeted?
4. Active or passive?
5. Tax driven?
6. Alternative assets?
There is arguably only one risk category – “cautiously
greedy.” In a low inflation, low growth world, there is an
inclination to try and defy gravity. From an adviser’s
point of view, much of the process should be
educational, protecting clients from their own greed and
slick marketing from product providers.
www.aberdeen-asset.co.uk/adviserintelligence
05
Investment Suitability
What the FSA really wants and why
The adviser’s goal should be to have a reliable method
of assessing risk tolerance, communicating what that
means with the client and a meaningful method of
taking it into account in the advisory process. Once
agreed, the risk score has to be linked to an asset
allocation and explained to a client in a way they can
understand. This in turn enables a client to make an
informed decision as to the financial risk in both their
plan and any investments recommended.
Paul Resnik, Co-founder and Director, FinaMetrica
Financial services businesses sell hope but
don’t establish investment expectations as
well as they should. Investments are often
shown to be high performing with low and
diminishing volatility. In practice, at least at
the portfolio level, performance after
inflation, fees and any taxes has displayed a
high level of volatility and delivered quite
moderate returns.
For the most part, advisers feel as if assessing a client’s
risk tolerance is simply another bit of bureaucracy forced
upon them. Yet, there is a fundamental benefit in
assessing it properly. It can be an important starting
point for a proper understanding of the client.
Advisers need to get their business communications in
relation to risk correct – advisory businesses put their
reputation and corporate value at risk every day through
poor explanations of risk and inconsistent, inaccurate
assessment of risk tolerance. The fundamental problem
is miscommunication of risk.
Risk tolerance, for example, tends not to change except
after some form of personal trauma. It is usually set
early on in life, but risk perception – i.e. how much risk
there is in the market - does alter. Risk tolerance is a trait
not a state.
06
Adviser Intelligence
Any assessment of risk should also be a foundation for a
conversation with a client. It is about helping them sort
through what is important in their financial lives. If
looking after the family is important, advisers will often
need to increase their insurance cover. In practice, most
investors need to take more risk than they are naturally
comfortable within their financial plan. If on the other
hand a client has grandchildren and greater wealth, they
might have different priorities.
This encourages greater client engagement in the
decisions to be made. At the end of the process, the
adviser must recommend an allocation to a mix of
defensive and growth assets. This may or may not be
consistent with their client’s risk tolerance. What is
important is that there is logic to the recommendation.
The FSA is demanding a very measured approach to risk
tolerance assessment. The FinaMetrica risk profiler is a
psychometric test – a combination of psychology and
statistics that could be called the science of questioning.
For instance, this plays out in how understandable the
questions are. The science is in the wording of the
questions.
We have found patterns of behaviour that are
inconsistent with actual experience. For example, those
who have a high risk tolerance, appearing in risk group
six (out of seven) , tend to over-estimate the rewards of
taking risk. If advisers know that their client’s investment
expectations are unreasonable in the first instance they
can help reframe them with a short history lesson.
Advisers need to manage their client’s expectations
because returns from financial markets are often lower
than those marketed. There is no equity risk premium in
the UK of any magnitude. Over the last 40 years, a
typical 50/50 growth and defensive portfolio has
delivered 2.1% pa over bonds and cash. This may be why
many people have lost trust the in the financial system.
Their experience is inconsistent with what was inferred
in the marketing materials they have read.
The FSA has been very clear that advisers have to prove
the integrity of every supplier of service to their process.
They have been very articulate in saying what they do
and do not like about what advisers are doing in relation
to risk profiling. In particular they are looking to see that
the risk profile reports tell of material difference and not
just report average scores. Advisers need to know what’s
different about their clients and treat each one
individually.
Fundamental building blocks for good advice and
to meet suitability guidelines:
1. Test accurately and consistently to assess financial
risk tolerance
2. Cash flow modelling tool
3. Proven resources realistically explain risk and
return
4. Provable portfolio implementation capability
www.aberdeen-asset.co.uk/adviserintelligence
07
Why cash flow modelling makes life safer for all
Robert Reid, Director of Syndaxi Financial Planning,
the Ideas Lab
An effective cash flow management system
can provide a much needed added-value
service and can engage clients with their
financial planning in a new way. They can
channel a client’s aspirations, define risk
capacity and help an adviser to calibrate a
client’s risk profile using their lifetime cash
flow.
Cash flow modelling has several key advantages for
advisers. It underlines their added-value service for the
client by engaging the client in discussions about their
financial future. The client is encouraged to talk about
the subject they know best, themselves, thus it helps
cement the relationship with their adviser. It is
important that the client realises they need to be part of
the process, but advisers need to avoid too much
tinkering once the cash flow model is in place, especially
as it will be reviewed annually. At the outset, it is better
to cap iterations at three, this keeps all involved fully
focussed.
Gathering information
This is a very important area, using the ‘rubbish in/
rubbish out’ principle. Initially we have found that it is
better to start at a high level. Getting too granular can
turn people off. Some software applications go too far
– ‘what do you give as Christmas presents’ is not a level
of essential detail .
08
Adviser Intelligence
Use of assumptions
Proper assumptions are the DNA of good cash flow
modelling. For example, inflation – what type? What
index? Does the index best relate to the client’s
circumstances? Expenditure needs to be grounded in
something that the client understands. Activity dictates
costs, so it is important to understand what the client is
going to do in future. Some clients have very different
ideas about how they are going to live their lives.
Ultimately it’s attitude to risk and resource that
determines parameters and longevity.
Other benefits of cash flow planning
Cash flow plans deliver an audit trail, which is very
important from a compliance perspective. They can help
determine capacity for risk, as advisers may need to
reassess a risk profile in the light of a cash flow analysis,
at inception and at each review.
Not suited to all clients
It will not suit all clients but even as a back check for the
adviser it still delivers value. For those clients that this
approach fits they need to appreciate it is not a one-off
discussion. Every review needs to take a reappraisal of
the options. It is also a good way to get a client to focus
on longevity – most people have unrealistic views on
how long they are going to live. No one wants to outlive
their money!
The client needs to understand the impact of different
options. Cash flow modelling encourages them to
consider different scenarios and work out which is right
for them. We find that those advisers who use cash flow
modelling techniques tend to have more settled clients,
who know what to expect, and who don’t just focus on
short-term investment performance.
Macro trends for adviser businesses
approaching RDR - Q & A
What characterises firms that have moved
successfully towards RDR readiness?
They are generally small firms with a strong local brand
and the capacity to take a short term drop in cash flow.
It is easier with just two or three people to agree on the
best model.
Malcolm Kerr, Executive Director EMEIA Financial
Services, Ernst & Young
From your research, which areas are advisers finding
most difficult?
In general, advisers are not doing enough research
among their clients. They are not judging their clients’
reaction to potential changes and adjusting their
fee-based proposition accordingly. They need to create a
really clear proposition, explaining what they do and the
costs. It also needs to sound interesting. They need to
shift to trying to sell advice rather than trying to sell a
product. It takes a leap in thinking.
Are you finding advisers are making that leap?
There is certainly more self-confidence around, but there
is still a big gap there and some advisers won’t make it.
These may leave the industry, choose to focus on
protection, or they may become an introducer. Those
who have a good network, friends with money, will
certainly be able to command an introducer fee. A
number will retire, though the perception of all IFAs
being near retirement is not right – there are quite a lot
of young IFAs.
The model is most challenged where people have built
their business selling investment bonds. Plenty of
advisers have been progressively evolving their business
model for a number of years. They have been
recommending mutual funds, moving to the ‘at
retirement’ market, to more sophisticated clients and to
trail rather than upfront commission. Those who have
not been on this journey will find it very challenging.
Overall fees are likely to come under pressure –
which part of the chain will be under the most
pressure?
Active managers who aren’t delivering genuine alpha,
but are charging the same level of fees will come under
pressure, particularly from the passive providers.
Platforms are also likely to come under pressure. There
are thirty platforms of various types, each of whom is
very keen to get market share. They need scale and price
is an important ingredient in generating that scale. We
are seeing increasing price competition and margins are
quite thin.
Your predictions for the number of advisers who will
become restricted is quite high. Why is that?
Yes, we believe as many as 50% of advisers will go
restricted. We talk to people running firms and they are
quite open to the idea of being restricted. The way they
see it, restricted means that they can offer what they
want and not have to jump through all the
‘independence’ hoops. However, it’s often not the same
for advisers. They associate restricted with being tied
and value the IFA brand.
www.aberdeen-asset.co.uk/adviserintelligence
09
In conclusion
1.
Fees are under pressure – clients will question why and to whom they are paying money when they are writing
out cheques. This is likely to have most impact on the competitive platform market, and poorly-performing
active fund managers.
2.
The decision as to whether to be restricted or independent post-RDR still remains a significant dilemma for
many advisers – Ernst & Young believes that as many as 50% of advisers will be restricted by the end of 2012.
3.
Retail banks may not be the competition – many retail banks are removing or reducing face to face advice
services to the retail market. Online guided sales propositions are likely to be the alternative. Private banks, on
the other hand, are raising their game.
4.
Advisers are becoming increasingly self-confident, recognising that they need to be selling themselves rather
than the products of insurance companies or fund managers.
5.
It is becoming increasingly clear that clients are more inclined to pay for value-added services such as cash
flow modelling than simply for the management of an investment portfolio. It is risky for advisers to take the
credit or blame for market movements.
6.
Adviser firm propositions are still weak. They need to create the right association for the client.
7.
Risk management is still inadequate and needs to be more scientific if it is to meet FSA guidelines. Most
issues arise from miscommunication of risk. Finding the right language to talk about risk is therefore one of the
most important goals for an advisory firm.
8.
Neither the FSA nor advisers have resolved the dilemma of how advisers can realistically claim and
demonstrate knowledge on all UK targeted investments – a requirement for independence under the
new rules.
9.
One of the key roles for an adviser will remain preventing clients from buying toxic products. In general, clients
value wealth protection above all and steering them away from high drawdowns will be vital in the long term.
10. The future is bright – the world is increasingly complex and clients need a guide. More people need good
financial planning, from new higher rate tax payers to the retiring baby boomer. The reputation of the industry is
improving and all advisers should reap the benefits.
I liked the insight into how unclear the
“
restricted versus independent debate remains
and also how much time, care and diligence
must be applied to risk profiling clients.
Lee Robertson, Managing Director, Investment Quorum,
attendee at Aberdeen’s Adviser Intelligence Series
10
Adviser Intelligence
”
www.aberdeen-asset.co.uk/adviserintelligence
11
For more information on Adviser Intelligence, please visit
www.aberdeen-asset.co.uk/adviserintelligence
Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen, AB10 1YG.
Authorised and regulated by the Financial Services Authority.
Aberdeen Asset Management
Bow Bells House
1 Bread Street
London EC4M 9HH
Tel +44 (0)20 7463 6000
2506923