2 min read 15 Mar 23
Financial advice businesses aren't what they used to be. The sector – and the role of a financial adviser – has been reshaped in recent years by a series of regulatory interventions and technological advances that have impacted every step of the advisory process.
While the basics of delivering financial advice remain largely unchanged, the expectations, demands and external pressures continue to grow. Firms are responding to the challenge by reshaping their own propositions and, in some cases, seeking to take greater control of them.
The incoming Consumer Duty may accelerate that process. Taking effect this summer, the Duty is the most significant regulatory overhaul since the Financial Services and Markets Act 2000 came into force, leaving even the Retail Distribution Review in the shade.
An emerging thread in financial advice is the concept of ‘adviser-as-manufacturer’ – or advice firms building or taking control of a greater share of the advice ecosystem. Under Consumer Duty, all advisers already are manufacturers – of their own advice services. Many are also manufacturers of model portfolios.
However, debate is raging over a further extension: as manufacturers of platform services. This is a different ball game and will probably require additional regulatory permissions.
While our State of the Adviser Nation (SOTAN) 2023 report suggests only a minority of firms have either done this or are planning to, the interest stems from the appeal of potentially enjoying more control, reduced operational risk and increased revenue diversification.
The issue took centre stage at our recent Home Truths event in London, where we enjoyed a timely discussion between two industry figures on different sides of the debate.
Among the advisory businesses to have gone down the manufacturing route is Fairstone, which last year partnered with FNZ to launch its own platform. While Anna Pollins, Managing Director (Partnership) for Fairstone, told the audience why the firm had chosen to build a platform, Philip Martin, of Unique Financial Planning, made it clear that for firms such as his, it made little sense.
For Fairstone, the attraction lay in being able to offer a solution for clients new to financial advice and with relatively simple needs.
“We launched a low-cost offering for clients at the entry point for financial advice and needed the scale, expertise and a tech solution to do that,” Pollins told the event. “You can control the cost through doing it through a single platform. Often advisers have to change their process to fit with a certain platform, so we wanted to control the process and, in this scenario, we had to find a platform to do it.” This might not have been possible five or even three years ago, she noted, with technological advance expanding the possibilities open to firms.
Regulation is an additional factor in making firms review their propositions, according to Pollins.
“The Consumer Duty should force you to break out the pieces of the puzzle, evaluate the value chain and where everything sits and see if there are better ways to put it back together again.”
However, Martin took a different view on the question of whether advisers should ‘stay in their lane’. He acknowledged that, on the plus side, manufacturing gives access to wider margins, potentially provides greater control of the client proposition, and in principle could give some continuity.
But he argued that the costs and risks for most companies are too high. “For small and mid-sized businesses, I think it’s absolutely bonkers. It’s a solution scrabbling around looking for a problem.”
To do it properly, for the risk you take on, you have to be a scale business in assets and advisers, he added. “The risk taken for a handful of basis points feels like utter madness to me. I can see a potential for us to sleepwalk into bad customer outcomes down the line as people rush to get onto that bandwagon.”
Martin said he understood why firms want greater control of the client experience. But it’s a “horses-for courses” issue, suitable only for a small minority of large firms. “For a scale business it could make perfect economic sense to manage the risk, take the cost base on and generate the additional margin. But in my business, there are better ways to spend our cash.”
That was the consensus among the Home Truths audience too, with more than 90% seeing adviser-as-manufacturer as a risk too far.
Pollins, while setting out Fairstone’s specific case, also cautioned against jumping on the adviser-as-manufacturer bandwagon. Firms need to think carefully about why they would take that step and the extent to which they have the in-house skills and expertise necessary to make it work, she said. “Clearly, we did a lot of work in selecting the right partner and putting the right risk and governance framework in place to do that. But it’s not a decision you should take lightly.”
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