Independent Financial Advisers (IFAs) have always held the power in the distribution value chain and those who realise this have leveraged their relationships with product providers, administration platforms and asset managers to ensure that they have prospered over the last two decades.
Most IFAs cherish and protect their independence, but the winds of change are now blowing more briskly suggesting that interdependence rather than independence is the way forward; for them and their clients.
Profiling the role players
In an effort to lock-in IFA support, product providers are in different stages of repositioning themselves as solution-providers rather than being regarded as product-pushers. IFA’s have responded to this trend in different ways. Some are totally affiliated to the large life assurers or established investment companies, some are partially affiliated, yet still independent and some are watching and waiting.
Most IFAs who focus on building businesses that rely on annuity income generated by an ever increasing investment book have been approached by the solution providers and presented with a value proposition that includes a mix of:
- capital for full or part-ownership;
- funding assistance for book acquisitions;
- assistance with model-portfolio construction;
- administration and asset management discounts;
- assistance with strategy development;
- co-creation of products.
A decision to partner, and perhaps sell out completely, means that the step to interdependence has been made. The critical issues underpinning this decision are ultimately the level of autonomy required by the IFA, the value provided by having a corporate partner and the potential positive impact on client experience.
Those who do not want to squander the benefits that vest with being purely independent may choose to sell up to 25% of their businesses, whilst those who are happy to insource all administration and asset management will elect to tie-up with those providers seeking total ownership. The consequences of making a choice to commit come with different levels of practice and customer disruption.
Facing regulation
Pending regulatory reforms have been a significant catalyst driving IFAs, product providers, administrators and asset managers to reflect on their current business models and to introduce strategies that will enable them to adapt and benefit from the challenges that the Retail Distribution Review (RDR) will introduce.
The principles of transparency of information, the delivery of quality advice, the removal of conflict of interest and the reduction of the total cost to the customer all need to be considered when making the choice to partner.
Outsourcing or insourcing
IFAs will also need to consider outsourcing to specialised fund research and portfolio construction offerings to avoid the additional risks and the costs required to meet the rigorous requirements of delivering quality advice.
A partnership model that ensures that independent advice and fund management deliver appropriate products at reduced total expense ratios is not possible with some of the solutions on offer in their current format. Discerning IFAs need to distinguish carefully to ensure that the changes required by acquiring a new owner or partner are in their clients’ best interests before signing on the dotted line.
Red or blue ocean?
To move away from the red ocean of fierce competition, client churn and price cutting it will become essential to strive for the delivery of added value at a lower total cost and to differentiate service offerings rather than trying to list more activities than competing IFA practices. Strategy is all about making the right choices, understanding how to adapt to new challenges and then executing on the plan. Product providers are positioning themselves as partners in this process which means that IFAs need to take advantage of this trend and commit to interdependency.
Paralysis is not a strategy.
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