9 Predictions for the UK Financial Services Sector

They say "it is dangerous to make predictions, especially about the future". However, we can't wander into the future with our eyes closed either. So, consider these less as predictions and more as the musings of someone who spends his days wondering what the future holds, and more importantly, how one might prosper in it.

1. Government engagement in the sector will increase through bodies like the FSA and Money Advice Service.
It may that government engagement (or is that just interference) in all sectors is increasing, but it certainly looks set to increase in the financial services sector. This should probably not come as a surprise after year of mis-selling scandals and an economic melt-down still raw in the collective psyche, and it is likely to be years before these effects wear off. The effect of such engagement will to change the shape of the industry, either directly by disallowing certain types of activities, or indirectly by changing the regulatory compliance and capital costs of other activities.

2. The Money Advice Service will be reconceived and rebranded within three years.
I don't believe that the Money Advice service goes nearly far enough to solve the underlying challenge, and as a publicly funded body, I think it is unlikely that it ever could or even should. However, I also don't believe that the powers that be will give up easily. As a result, it will be declared to have failed to achieve its objectives and simply resurrected under a different name. That is ineffective, inefficient, confusing and sadly almost inevitable.

3. The number of IFAs will reduce from about 30,000 by as much as 25% over the next three years.
This is because many will fail to qualify and/or be unable to communicate a value proposition for which customers are willing to pay. Much of this reduction will be in the form of early retirement. (See also The RDR: unintended consequences.)

4. Demand for financial solutions will continue to increase.
Consumer confidence in the industry may continue to languish, but demand for financial solutions will continue to grow. On the demand side, historic increases in longevity show few signs of abating (despite numerous predictions), increasing desires to enjoy a long and experiential retirement, and general increases in living standard and the accompanying hunger for more and better technology. On the supply side we have the steady decline of defined benefit and state pensions. It only remains for someone or something to regain consumer confidence in order to unlock this excess demand.

5. Those IFAs that remain will cluster towards the high end of the market.
With the costs of regulatory compliance and capital increasing, there will be fewer who can afford personalised face-to-face advice.

6. Technologically enabled direct propositions will creep up from the lower end of the market.
Technology is rapidly moving from the back-office into more client facing applications. This is true for IFAs who will increasingly rely on mobile applications to use in front of clients (as opposed to just back at the office), but also true for direct-to-consumer services. Customers will both demand and get richer planning tools, rather than simple price comparisons and product supermarkets.

7. Distribution will dis-aggregate with advisers focusing on financial planning and outsourcing asset allocation and investment management to specialist suppliers and outsourcing product analysis and selection to paraplanners.
As fee earning IFAs start to think more like professional services businesses, they will look to cut costs out of the value chain and achieve efficiencies through increased focus. This will ultimately result in the right-sourcing of many non-core components of the value chain, and specialist providers will develop in order to meet that need. Direct-to-consumer proposition will face similar pressures in order to bring services to consumers cost-effectively and at scale.

8. There will be a consolidation in the wrap provider market, with only a fewer of the smaller ones able to find a profitable niche in which to prosper.
There are around 30 wrap platforms on the market at the moment, but market share is concentrated in the big 3 (Skandia/Selestia, Cofunds, and Funds Network/Fidelity). Given that most advisers use only 2.1 platforms for new money flows, it's hard to see all of the smaller ones surviving. Those that don't may get bought out, morph into corporate wraps, or find other niches.

9. There will be an ongoing drive to corporate wrap, payroll and benefits administration in order to retain corporate business in the face of the RDR and NEST.
The corporate pensions sector will be the hardest hit by the RDR as large parts of this have been historically funded out of commision recouped from members contributions even though the members themselves may have received little or no personal advice. With NEST providing an easy "no-regrets" option for employers, the private sector will be looking for ways to demonstrate future value-add in this market.

Only time will tell if I am right, of course. But in the meantime, the causes and effects of these predictions can be profitably debated. What do you think?

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.