Is it possible for all advisory firm to establish and run a successful self-directed proposition? Rebecca Jones investigates...
Self-directed - or direct to consumer (D2C) - propositions have, in the past, been considered a threat to traditional, client-facing advisory practices. However, as the ban on trail commission forces low value clients out the door, it seems some advisers have begun looking to these propositions as an alternative.
These include Susan Hill, director of Susan Hill Financial Planning, who is currently in the process of setting up a self-directed proposition through IFDL, which is launching a pilot scheme offering D2C capabilities to current users.
Hill explains her motivation: "Some people will not be able to afford the fees I am charging but that does not mean that they should be turned away. Most just want to save monthly into an ISA or pension and that is what these propositions offer."
She argues that retaining these small value clients through the use of a self-directed platform can also reap rewards later.
"If somebody is coming to you for their regular savings, then when they do inherit something or find themselves with a lump sum, you are potentially first in line for them to ask advice from," she says.
If you are considering setting up a self-directed proposition, the first thing to think about is the infrastructure. As Jason Hollands, managing director of marketing and communications at Bestinvest, observes, this usually means IT - and lots of it.
"The primary interface is going to be online so, firstly, you need online functionality and behind that you need a solid, robust operational platform," he explains.
There are two options here: the first is to construct everything in-house from platform to website; the second is to use a ready-made platform such as IFDL or Cofunds, and overlay that with your own website.
The latter - Hill's choice - is likely to be more attractive to smaller firms, as it will involve far less investment. However, you will have to pay for the privilege of using a third party platform, which will ultimately drive up your clients' annual management fees and reduce your competitiveness.
Your second consideration should be content, particularly educational material, as good functionality is rarely enough to make a successful D2C provider, says Hollands.
"The vast majority of D2C investors may not be taking advice but they do need quite a strong helping hand," he claims.
"Nine out of ten funds with the strongest flows on our platform will always be ones that have a five star buy rating from us. Very clearly, people follow and value our research."
A recommended funds list, combined with performance data, may be useful but more helpful to investors will be information and tools that help them to understand concepts such as risk tolerance and asset allocation.
These can include static guides, online tutorials or, perhaps, educational videos. If you want to go one step further, you could follow Bestinvest's lead and offer ready-made portfolios containing a basket of funds designed for different risk profiles.
You will also need to determine how you will run the proposition alongside your current business, particularly how much contact you will offer. If you plan for as little as possible, the amount of online support you provide will be crucial.
"You need to have mechanisms for clients to look at their investments, transact and make decisions without speaking to you. The danger is that the client you have looked after for 20 years keeps picking up the phone to you because they know you," explains Danny Cox, head of financial planning at Hargreaves Lansdown.
Inevitably, a certain amount of contact will be needed - if only to answer technical questions - and so it may be wise to apportion certain hours of the day to answering emails and telephone calls. However, while this may help you to run your face-to-face business, not being readily available to answer queries may dampen the attractiveness of your proposition. Hill is open to the idea of telephone contact and plans to offer her D2C clients a free, 30-minute consultation.
"Somebody can phone me up and I can generically say to them: 'Ok, where are your debts and liabilities? How much are you earning and saving? Stick it in an ISA or pension'," she explains.
Perhaps the most important question you will need to address is whether or not you have enough business to put through a self-directed proposition. If you do not, marketing will need to be a further consideration and one Cox claims should not be underestimated.
"You need to dedicate significant time to your marketing, how you document your mailings and so on. Clients won't just come to you," he says.
As a starting point, it may be helpful to think about who might be inclined to use your proposition. According to Cox, the average age of a self-directed Hargreaves Lansdown user is 55; however, they also have a large proportion of much younger users aged between 30 and 50. When it comes to marketing, this may present a challenge for advisers like Hill, who are used to different clients.
"My normal age group is retired, aged 65 and over. However, for this, it is probably the 30 to 50 year olds, so marketing will have to be much cooler," she says.
With this in mind, Hill adds that she may draw inspiration from high octane events such as the Winter Olympics.
Scale and cost
Getting as many clients through your proposition as possible is likely to be crucial to your success as, once all of the above has been considered and implemented, you will probably have significant costs to recoup.
"Do not underestimate the scale and the length of payback period you need to launch a D2C, non-advised platform now," warns Hollands.
"It is becoming quite a crowded space and getting your money back may take a very long time."
Getting the right scale for your D2C offering is now even more important thanks to the current 'price war' waging between platforms, which has seen Charles Stanley offer funds at charges as low as 20bps. The current average is sitting somewhere around 35bps, which, according to Cox, means any new platform would need at least £2bn of assets under management to "get anywhere close" to having everything in place that it would need to run successfully.
This point is not lost on Hill, who admits that servicing clients through her D2C offering will be a largely altruistic exercise due to the costs involved.
"I do not think it will make money. IFDL charges 0.25% per year and then I can add a distributor fee, but that will just cover my costs," she says.
She adds that she plans to charge a monthly fee but that it will likely have to be significantly below £50 when the size of a portfolio is taken into consideration.
There is a lot of work and cost involved in setting up a D2C operation, which is why many smaller advisory firms themselves seem intimidated by the idea of establishing and successfully running one. Yet, it does seem that such firms are becoming increasingly interested in the proposition. With initiatives like IFDL's making it easier and more accessible, success may just be becoming a little more achievable.
What do you think?
Alan Lakey, partner, Highclere Financial Services
"The problem with self-directed is that it is totally reliant on the consumer/client actually doing something of their own volition. While there are some consumers capable of assessing their own needs and acting sensibly, there is a larger percentage who either fails to act, only scratch the surface or act foolishly."
Graham Bowser, principal, QS Financial Planning Solutions
"Pensions and investments are just far too complicated a subject to tackle without detailed understanding and knowledge. Even the CII 'R' papers do not give the knowledge needed to do the full job for 'at retirement' clients, so what chance have consumers got on a DIY basis?"
Alistair Cunningham, director, Wingate Financial Planning
"Small to medium sized advisory businesses should stick to high impact, high value face-to-face advice. Lower value, lower margin services can be profitable but only with the sort of scale that very large firms can achieve."
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