The Financial Conduct Authority (FCA) has hailed small IFA firms for adapting successfully to the retail distribution review (RDR) and is hoping their evolution can help plug the advice gap.
Last week the regulator published its first progress report on the advice market a year on from the introduction of the RDR.
A drop in the number of bank and building society advisers, down by 26% from 4,810 in January 2012 to 3,556 in January 2013, initially stole the headlines, but behind these numbers there was evidence that small IFAs were thriving in the new world.
Not only had the number of financial advisers increased, albeit marginally by 6%, but FCA chief executive Martin Wheatley and Nick Poyntz-Wright, director of long-term savings and investment, both singled out smaller firms for praise.
Flexibility of smaller firms
Wheatley highlighted a survey by NMG, which suggested IFAs had been boosted by the RDR and seen a 4% increase in recurring revenue. He contrasted the banks’ inability to adapt their models, and decision to pull out of advice, with the flexibility and evolution of smaller firms.
‘Since RDR, the smaller players have been more aggressive in creating new models and the bigger players have been slow to do it,’ said Wheatley.
‘We create certain amounts of structure, but then the market has to work out how it best delivers the service and makes its money. One of the things we’re watching is how the market is evolving and in a sense, pre-RDR, there was no impetus to create different charging models.’
Tim Page (pictured), director of Bury St Edmunds-based Page Russell, said smaller firms’ size forced them to be more adaptable. ‘Smaller IFAs have more skin in the game,’ he said. ‘They’re going to look for ways to make the new world work rather than a senior manager at a large bank who is looking where to allocate capital. They’re looking at the market through different lenses, so you’re going to get different outcomes.’
Phil Billingham, a compliance consultant and director of London-based Perceptive Planning, said small firms’ success since the RDR was due to their relationships with clients. ‘[It has] always been the case [that small firms deliver the best consumer outcomes] and that will continue to be the case,’ he said. ‘They are closer and more responsive to their clients because they have got to be.’
These firms would continue to lead the way, he added.
Advice gap due to banks’ exit
The FCA is hoping they will take the lead on one of the more awkward legacies of the review: the advice gap.
In September, Wheatley was questioned over the impact of the RDR by the Treasury Select Committee and conceded that he was concerned about the emergence of the advice gap, caused largely by the banks deciding to exit the advice market.
Speaking last week, he said it was hard to find low-cost advice models that were commercially viable and compliant with regulation. ‘The single biggest difficulty in how the market has evolved has been the advice gap,’ he said. ‘We’re trying to work with the industry [on this]. Given that people want to be in this space – the big market, mass market players want to be in the position to give advice – they have to find a lower-cost way of doing it. That’s a commercial development.’
Poyntz-Wright (pictured) said the FCA was interested in the less expensive models emerging from smaller businesses. ‘We are keen to make sure the market works effectively for customers, including those who perhaps thought the cost of advice excessive in proportion to the wealth they have,’ he said. ‘Smaller firms are coming up with offerings that we’re interested in, so we’re interested to see how those are working, how they are communicated to customers and what they’re getting.’
Rise of technology
Chris Daems, managing director of London-based Principal Financial Solutions, said improving technology and the advent of auto-enrolment could make it more viable for IFAs to service the mass market. However, he said these would not provide answers overnight.
‘Auto-enrolment will engage more individuals than ever before and the growing popularity of technology-based DIY mass-market solutions may move in to fill the gap,’ he said. ‘However, both auto-enrolment and technology are long-term solutions and won’t solve the problem anytime soon.’
While the FCA has put its faith in smaller firms, the feeling is not entirely mutual. Advisers may have adapted to the RDR, but they are concerned over how much more change is on the way. They are worried about the FCA’s concerns over percentage charging. In June 2013, the regulator published research suggesting clients did not understand this fully.
Page explained: ‘My worry is that the FCA’s worries about contingent charging could create an environment where the FCA moves to fix it. I don’t think that’s going to happen, but if firms try to carry on the old world within the new rules then there is a risk that the FCA will take a sledgehammer to crack that particular nut.’
Poyntz-Wright said the FCA would not be prescriptive about the way firms charged as long as the charges were explained to clients in cash terms.
Billingham said he would like to see the FCA clarify the definitions of independent and restricted advice.
Poyntz-Wright acknowledged the regulator’s attempts to explain the post-RDR definition of independence had failed to dispel confusion in some parts. ‘We are hearing confusion around, “Well, what does this really mean?”,’ he said. ‘We have made our best efforts to be completely clear, but it doesn’t seem to be working completely.’