In my previous post I talked about the opportunities and the challenges facing IFAs in the next five years following the RDR and the end of legacy commission. Let’s continue the discussion in this post and focus on the technological changes that will be shaping the industry in the second half of the decade.
As I’ve mentioned the marketplace is emptying of competitors. RDR and the end of commissions including legacy commissions in April 2016, combined with ever greater regulation has forced many small firms and one man band IFAs to retire or sell their businesses.
This is good news for many firms who will find attracting clients far easier, but there is of course a catch, in order not to become one of the firms forced out of the market you have to offer a compelling and strong service proposition to clients.
This means that firms will have to invest in support systems for their IFAs, ensure that advice is consistent and that advisors are compliant with industry regulations.
After the end of trail commission, charges to clients will undoubtedly increase, meaning that IFAs will end up serving fewer but higher net worth clients who can afford face to face advice.
One of the huge challenges facing all firms is the growth of cheap online advice that will soon be available as a result of the internet.
Instead of relying on the professional opinion of an IFA, one of the cheapest ways of making investment decisions that is coming on to the market is to rely on an investment algorithm.
This type of mathematical software is already used widely throughout the financial sector, particularly on the stock exchange, but it is so far a poor substitute for years of human expertise. Although not a serious challenge at the moment, tech savvy people who do not need the face to face contact of an adviser will use automated advice systems more and more over the next few years.
Some IFAs will no doubt use Skype, FaceTime, Google Hangout and other means of online video conferencing to offer affordable investment advice, this will cost more than relying on a computer programme but will still involve significant savings.
Some advocates for technology argue that these innovations will start to close the advice gap that has opened up as a result of the RDR and the looming end of trail commission. Whilst I applaud their optimism, I’m not so sure. I certainly think that transformative technologies like Skype can do an awful lot to add value to the experience of many clients, but it will not be sufficient to close the advice gap.
Firms, after the end of trail, have little alternative than to focus on wealthier clients, and unless the government acts there will be little chance of the market fully correcting this imbalance.
Compliance and regulation have also opened up the advice gap, running an IFA business is more challenging and expensive than it has ever been, and as a result the costs cannot be absorbed solely by the business and must be borne in part by the client, enabling only the wealthier to be able to access advice.
Unfortunately, regulators in any industry rarely see the existing level of red tape as ‘enough’, and in the financial advice sector this is especially true. Governments of all colours are eager to continue enforcing new rules on the industry and this will mean more smaller firms will struggle in the future.
Not only has the government placed greater burdens on the sector, but the insurers that IFA professionals rely on to underwrite their businesses have also demanded more.
The personal indemnity insurance that forms the bedrock of any sound IFA’s work has shifted more risk on to the IFA and has become less inclined to offer cover on a wider range of issues and ‘danger topics’.
With these pressures bearing down on firms, the only way that advice will become affordable to lower income investors will be through government action and we could potentially see the reintroduction of some kind of commission.
When more direct and non advice led ways of helping people invest emerge, it will have a knock on effect on the IFA sector. It is most likely the wealthier clients will still pay for face to face advice, but a certain proportion will always look for cheaper options, so it pays to master this technology while it is still in its infancy.
This will of course result initially in the costs associated with running an IFA business increasing, but as I mentioned in my previous blog, technology cannot be ignored, especially when it can also help to drive down the costs of servicing clients effectively.
If you are hoping to stay in the IFA sector and weather the changes that are soon going to affect all of us, but would like to take advantage of the support a bigger firm can offer, Bradbury Hamilton can help.
We are currently exploring the possibility of buying IFA firms with turnovers up to £1 million and taking them under our wing, we’re offering their owners the support and structures that they may struggle to afford on their own.
If you’d like to have an informal chat about the future of your firm, contact me here.