by Rory Curran, Managing Director, 1st Software

Rory Curran, Managing Director, 1st Software

The prospect of new rules generally fosters three reactions: 'no change'; 'wait and see' or 'exploit the opportunity'. We have seen many potentially cataclysmic threats to the IFA sector over the years, most driven by the regulator, which have come to nought so there is some logic in staying put. However, it is not the regulator alone who is driving the change. Market forces are often more destructive to the modus operandi than any watchdog. For example, many argue that indemnity commission is a subsidy that artificially shores up unviable businesses and, in the present climate, the providers cannot continue to support such large up front payments. It has to be assumed that this form of remuneration will dramatically reduce, possibly disappearing altogether over the next couple of years. At the same time, business costs must be addressed to maintain reasonable margins. The scale of the problem is open to debate but there is no question that the economic model of the industry is changing fast, so it is essential for all adviser firms to make realistic commercial plans for the new order if they wish to be profitable in the future. This will inevitably involve making some difficult decisions in the short term but, given the increasing demand for financial advice, the future opportunities look very positive.

So what are the key changes that advisers need to put in place to anticipate and exploit the new future? At 1st Software, we have developed our vision of the future, the 'New Model Adviser', in which independent and multi-tie both play a part:

'New Model Advisers' put their clients first. They are 'trusted' to act in the client's best interests at all times, incentivised to advise long-term rather than sell short-term Their sole aim is to look after clients' total financial well-being. They spend their time profitably, dealing cost-effectively with clients, building relationships and generating revenue, whilst minimising their involvement in administration by having an efficient support infrastructure behind them. Technology is used powerfully in every area of the business to add value to the client relationship and to remove maximum cost from the administration and service processes. The 'New Model Adviser' builds credibility in a service which is vital to the UK economy.

How does the New Model Adviser translate into practice? The principles in the New Model Adviser: 'putting the client first' and 'trusted to act in the client's best interest' are a vital ethic if the industry is to achieve the credibility it craves. Equally, it will also be an important differentiating factor from the large distribution channels that will be selling products in volume.

Remuneration is critical to incentivise advisers to build long-term client relationships. Most businesses have seen the importance of building up a high proportion of turnover from recurring revenue and this must be continually increased. Not only does it take the emphasis from having to make the sale, it also builds far more value in a business if it is to be sold in the future.

Looking after a client's total financial well-being is an ambitious objective and has been seen chiefly as the preserve of wealth managers. However, offering a range of services is a powerful attraction to clients who prefer to deal with one organisation. Alliances and joint ventures with other professional firms are becoming increasingly common in an IFA world that has been historically insular. From a commercial angle, specialism combined with a broader service offering is less risky when markets are volatile. It's also another differentiator from the less flexible bancassurers.

Advisers will have to pay more attention to spending their time profitably. This is an alien concept to many because traditionally focus has rested on periodic target achievement rather than planning time effectively. In other words, there's more flailing than thinking ahead. Equally, client profitability is an important consideration, so decisions have to be made on service levels. The days of giving regular valuations to clients who are not paying for the service are likely to be short-lived. This does not mean you cannot help the less affluent clients but the level of attention cannot be as high.

There is no question that every adviser needs an efficient support infrastructure. Client contact generates revenue and work, but the New Model Adviser must be focused on revenue, not administration.

Technology plays an instrumental role in all aspects of the New Model Adviser vision. Client management systems, portals, e-business and integration with fund platforms all exist, although there is some way to go to achieve the end-to-end, straight through process that is essential to future profitability. The technology suppliers face an equally difficult challenge in the world of the New Model Adviser.

The New Model Adviser concept is based around the changes that are necessary for firms to survive in the future. It is not all to do with depolarisation; it is about putting the client first and differentiating advisers from the product sellers employed by the banks and large retail institutions. Neither is it all to do with going totally fee-based; it is about having a balanced remuneration structure that gives the client choice and the adviser fair reward.

The concept of the New Model Adviser encompasses all the facets advisers need to address to ensure future profitability. At 1st Software we are working with a broad range of senior people from across the financial advice industry to develop this concept into a workable business solution. We will report on our findings in the coming months and look forward to further constructive debate and feedback.

About Rory

Rory came into the financial services industry as an IT trainer in the mid 1980s with LSD software, where he became Customer Services Director. Since then, he has had spells with Fame Computers and The Exchange, but his career ambition was realised when 1st Software was launched in 1996 with Mik Cons.