Quality of advice alone does not offer IFAs a “compelling differentiator” from larger groups and rejecting managed funds is the first step to true independence.
This is the view of Bailey Roberts Group director Leith Thomas who believes the Future of Financial Advice (FoFA) reforms have forever changed the landscape, forcing the consideration of alternative sustainable models for independent advisers.
“As well as the economic environment over the past few years, FoFA legislation has changed the landscape – forcing a major rethink in how independents position themselves in the market,” he said.
“While many advisers are being integrated into the large dealer groups, others are struggling to offer a strong value proposition to their clients.”
A compelling differentiator
However, Thomas parts ways with conventional wisdom by asserting the view that “Bailey Roberts Group does not believe advice alone offers a compelling differentiator from the larger groups”.
“While many advisers claim independence from the large groups, they are still using wrap accounts and platforms owned by product producers – and therefore offering their clients the same resources in terms of research, risk management and products as the dealer groups,” he says.
“In reality, many of the so-called independents have become sellers of a commoditised product. Not only does this mean that a clear value proposition is not being offered, it also exposes independents to the risk that as clients become more educated, the major selling point for them will be based on price. That makes building a sustainable business model difficult.”
Thomas also warns that even being compliant with all aspects of FoFA and the regulator’s guidance on various aspects of the impending reforms does not ensure success.
But it is the value offered by managed funds that he believes is at the root of the problem.
Rethinking managed funds
“Managed funds are a commoditised product, offering little or no performance differentiation over the market,” he says.
“Do clients see value in charging a 0.5-1 per cent fee for advisers placing their funds with a manager? Can there be a sustainable business model around charging a fee for this?
“Managed funds offer neither client nor adviser control over where the funds are invested, how the funds are managed, nor how issues such as tax are managed.
“There is also no control over what other unit holders will do or how their actions will impact the remaining holders units.”
Peripheral services not the answer
Thomas concludes that clients have an expectation that their adviser is managing their money and to build a business model that relies on ongoing revenues from client assets – while not providing any real ongoing service or value to those assets – is a high-risk model.
“It means having to use peripheral services such as reviews to justify ongoing fees – a strategy that many advisers have currently taken,” he says.
“Not only is scale difficult with this type of model, but it means clients do not see value in the offering.”
“In order to avoid their advisers being seen as commodities, merely offering advice and client reviews, independents need to offer a clear value proposition.
“The direct management of portfolios offers clients a clear differentiator, and a cost effective offering.”
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