Change happens - deal with it

There has recently been a fascinating debate on Money Marketing in response to Martin Bamford's feature There is more to IFAs than making a profit.

In it, an IFA who identifies himself only as "steve" ended his explanation of why he was selling his business with: "Still, why should I care? I've got the best excuse ever. The FSA forced me out of business!!!!" Part of Steve's gripe was that the FSA was making it harder for him to cross-subsidise those parts of his customer base who could not afford the full price of his service by those who could. I hope that Steve heads off for a happy retirement, but it seems a pity to end a career on such a sour note.

Anyway, I thought it worth repeating a slightly edited version of the response I posted:

The basic facts of commerce are quite simple. Markets change: customers' needs/wants change, the prices they're willing to pay to have them satisfied change, the regulations change, competitors and suppliers change, the technologies we use to bring products and services to market change.

Firms that don't adapt and innovate in response to those changes eventually go out of business. They always have and they always will. This is true of all markets.

Cross-subsidisation, where customers who can pay more to make up for customers who can't, may be a good strategy in the short-term. However it is not sustainable. It creates an arbitrage opportunity and sooner or later your competitors will discover and exploit that. They will steal your higher paying customers by charging them less, and leave you with only those who cannot pay. As the Internet brings more information to more people, transparency increases, and cross-subsidisation strategies become ever more short-lived.

If your firm doesn't adapt in response to changes in the competitive environment, it will fail. If it's not the RDR that gets you, it will be NEST, the Money Advice Service, the emergence of D2C offerings, socio-economic trends like increasing longevity, general economic malaise or whatever else is waiting just over the horizon, that does. No amount of complaining about the FSA or the RDR will change this.

Unfortunately, it seems that many people who are perfectly good financial advisers lack the business skills to identify and understand these environmental changes, and to come up with strategies to thrive despite them. This is likely to lead to many exiting the market, either by choice or by being forced out. New business models and innovations will be needed to fill the space they leave.

When the market is stable, it is (relatively) easy to eke out a decent living. The more disrupted a market is, the more some businesses are able to grow very rapidly, even as others are forced out. The retail financial services market is currently undergoing significant change, and there will be some big winners and some big losers.

The RDR: Unintended consequences?

The Retail Distribution Review started out with laudable goals, such as widening access to financial markets and advice, and increasing customer choice. But what might be some of the unintended consequences?

Advisers may leave the market early, reducing the availability of advice.

The increased cost of regulations (accompanied by increased costs of capital), and additional qualification requirements (without grandfathering) may lead advisers to exit the market, or just to retire earlier than they might otherwise have done. According to evidence submitted to parliament by the Adviser Alliance in Feb 2011 independent surveys suggest that 20-50% of older advisers may leave the market. Research from Aviva suggests about 7% of advisers in total will leave the industry.

As of June 2011, recruitment consultant BWD says 35% of advisers have not passed any papers towards QCF level 4. The CII has further pointed out that the pass rate on some diploma papers is as low as 50%.

Barclays has already closed down Barclays Financial Planning at a cost of 1,000 jobs, and although, for example, AWD Chase de Vere has already picked up 20 of these, these are likely to be only those who are already fully qualified.

Adviser charges may increase.

Aside from the more obvious increased costs arising from increased qualification requirements, regulatory burden and the cost of capital in the absence of the factoring effect of indemnified commissions (the FSA estimates that these incremental costs could amount to 0.3% of the value of annual retail investment new business), confusion around the application of VAT may lead some advisers to err on the side of caution and overcharge for VAT.

Increased disclosure requirements around adviser remuneration may mean customers actually read less.

Addition disclosure may add to the mountains of paperwork customers are expected to read, and may, in fact, mean that even fewer customers can be bothered to try and read it all. Disclosure will need to be more focused and clear, rather than simply more extensive.

All of the above suggests tough times ahead for advisers. But as Ralph Waldo Emerson once said "Can anyone remember when the times were not hard and money not scarce?" The challenge remains to find opportunity in adversity.

Product innovation may decrease.

As advisers and providers alike focus on changing their systems to allow for adviser charging and VAT etc., they will have less time and resources left over to devote to product and service innovation and improvement, and new product launches.