The FSA's depolarisation plans will mean an end to the financial services industry as we know it but those who are able to adapt quickly to the changed environment will be well placed to build a successful business
Few people in this industry have the vision to realise we are embarking on a seismic change to our existing business models. All our previous beliefs and experience are now in question.
Who would have thought back in 1999 that the FTSE would fall to 3600 this year. I certainly never thought, when I saw Aberdeen Asset Management's share price at £7, that I would see it fall to 92p.
And who would have thought in 1999/00, when investors were tripping over themselves to fill out their Isa application forms, that we would be sitting in a market with such tremendous investor apathy.
So how are intermediaries going to make money in this environment? And how many of us will still be here in 18 months' time?
Well, let's quickly look at the background. The FSA proposes to end polarisation. Tied advisers and IFAs will remain as key intermediary groups but a new distributor will be created that will allow intermediaries to sell either one company's products or every companies'. How is this going to impact existing distribution? Are some advisers need to think about today so they will still be here in the future? Do they want to remain independent? Is the tag of independence important? Or are some advisers happy to be a distributor firm, distributing one or all of a provider's products?
There are currently some 11,000 intermediary firms with a whopping 65% of the market. Below them come tied agents and tied banks salesforces with a 32% share, followed by the 3% of clients who effectively buy off the page through their local newspapers or similar sources.
Implementation of the FSA's proposals will reduce the number of independent financial advisory firms. Not only that, but new firms with a high street presence, brand and the ability to access clients cheaply will come into the market, taking advisers' market share.
Further down the line, perhaps 18 months to two years, the intermediary market share will have been devastated, moving from some 65% to around 35%. The key issue for advisers is how to position themselves to make sure they take the lion's share of that 35%.
The current 11,000 intermediary firm count is being pushed down for many reasons. These include changing consumer behaviour, intermediary product simplification and lack of capital.
So if an adviser is going to make money in this market, where will they have to position themselves? The short answer is that some will not be able to. Some intermediaries will throw in the towel and because it will not work for them.
Those that aim to survive need to add value to their businesses and seek out the market segments in which they would be best suited to operate.
Looking at the market as a whole, at the very top end are private family offices and private banks. Next come high-net-worth individuals, the adviser's core market. This is the market segment with high disposable income, a big investment portfolio but difficult financial situations that need advice.
Moving down further, we have the emerging affluent, who are probably looked after by a distributor-type of operation such as a bank or building society salesforce.
Below them are the small-time savers and investors served by the the banks, the building societies and the new distribution high-street models previously mentioned. Last are the new entrants buying the Sandler-type product, the £10-£20 a month people.
So if advisers examine their existing businesses, they need to look at those clients that will be profitable to them and those that will not.
Whichever area an adviser chooses, they must deliver choice and value. The market is becoming increasingly price aware rather than price sensitive and there is a need to demonstrate value. The best way of doing this is to look at the mixture of what has happened in the US and Australia over the past 10 years.
In the US, the advent of the fund supermarket and bank wealth management service was meant to sound the death knell for financial planners but the opposite has occurred.
The financial palette has changed. Financial planners consolidated their client bases and specialised in offering bespoke, holistic investment services. They limited their client bases to around 100 and charged a 1% management fee for looking after and advising on the total assets of the client.
This had the benefit of providing financial planners with a superior income. The average income of a financial planner in the US is some $400,000 a year (£300,000). It has also led to the job of financial planner becoming one of the most sought after careers in the US.
There has been a perception change among clients. Most financial planners now advise their clients on a generational basis. Instead of concentrating on short-term investment, they are looking to provide for themselves, their children and their grandchildren. Taking a 40-year view on investments means, as a client, you are less likely to be perturbed by short-term stock market volatility.
One of the areas into which financial planners have moved is multi-manager products, a market place I believe will expand massively over the next five to 10 years.
It is the demand for open architecture that is pushing all fund managers into moving into the multi-manager marketplace. It is giving our clients the diversity of manager risk.
For too long in this industry, there has been a fund of the moment that everybody has put their money into only to find it is the fund that disappoints most in the next year. This has been a product of our own marketing and, as an industry, we need to move away from it and give people more diversification of risk.
Multi-manager is an area in which advisers can add tremendous value to their clients while taking away responsibility for making investment decisions themselves. Because of this, they will have more time to look after and grow their businesses.
In the Australian model, using technology to put all a client's assets together has been absolutely key. It is this ability to give adviser's clients that 24/7 view of their net worth that is now of upmost importance. Once they are in those platforms an adviser can charge a fee.
The intermediary market is a tremendously powerful distributor for providers. Intermediaries currently account for some 60% of all investment fund sales. There are 11,000 firms and some 35,000 registered individuals looking after 15 million clients. It's not going to disappear in a day but we all have to work hard to retain it.
EIS and Seed EIS sectors
'Truly making a difference'
Avoidance, evasion and non-compliance
From 6 April 2019