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The future of the advice market in the UK

Phil Deeks, TCC, Technical Director, London, 10 May 2017

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The advice market of the future is likely to be worlds apart from that of today as a result of the rate of regulatory change, the ever-changing demands of HNW consumers and external pressures such as political intervention.

Strategically speaking, it is important for firms to start thinking now about how they are going to adapt to this new advice landscape and how they are going to service the next generation of customers.

Business models of the future

Current business models tend to be too similar, being little more than reflexive responses to the Financial Conduct Authority’s rules. More often than not, they fail to get to the heart of the customer’s needs by taking this approach.

To meet the needs of the next generation of consumers, the industry ought to take a fresh look at business models through the eyes of its clients. Only then can it identify future needs properly.

The wealth of the next generation (who are not particularly well served by wealth managers at the moment) will inevitably be tied up in pensions, given the introduction of pension freedoms and auto-enrolment in the UK. Members of that generation will soon start inheriting the assets of their parents and past experience suggests that they are likely to come to the industry with a limited knowledge of the issues surrounding personal finance.

Ultimately, your wealth management firm cannot 'future-proof' itself (i.e. stop itself from becoming obsolete) by tinkering around at the edges of its organisation. Instead, it will have to make fundamental changes from a purely customer-centric perspective. If it can do this, it will gain not only a competitive advantage but also, in all likelihood, crucial support from the FCA’s Advice Unit. This was established in the wake of the Financial Advice Market Review (FAMR) to ensure that the FCA’s rulebook did not stifle innovation inappropriately. Firms should not, at least initially, be constrained in their ambition and enterprise by the nuances of the FCA’s rules.

The rise of vertical integration?

Vertical integration is the accumulation into one firm of several stages of production that separate firms normally undertake. It is hardly a new business model, but in the aftermath of the Retail Distribution Review and in the light of pension freedoms it is becoming more desirable, particularly for larger firms.

With appropriate governance and oversight, vertically integrated business models can enjoy greater economies of scale, make the "customer journey" more cohesive and involve customers in the decision-making process more readily. However, this business model is not without inherent conflicts of interest and can also damage competition in the marketplace, so it has to be managed firmly and with probity. Given that the FCA is paying greater attention to competition-related issues that affect the proper functioning of financial markets, this could be a topic for future consideration.

It looks as though vertical integration is here to stay, with the FAMR presenting businesses with fresh opportunities. Regulatory rules only affect vertical integration insofar as they ban cross-subsidisation.

Vertical integration might, however, hurt competition and therefore the best interests of clients in some cases. The FCA’s recent Mission Statement mentioned the risks associated with it specifically, so it is safe to say that firms that already operate or want to adopt a vertically integrated model will continue to attract interest from the regulator if they do so to a significant degree.

Below this article is a diagram that shows the recent evolution of the advice market in the UK. The sectors in which vertical integration is a major factor are contained inside the red cordon.

The changing role of the platform

We have also witnessed a significant change in role of the platform in financial services since its introduction more than a decade ago. Over the years we have seen a reversal of the master-and-servant relationship that used to exist between investment managers and platforms. In the early years, a typical platform had to court the large investment management houses to ask them to allow it to host their funds. Since then, an explosion in the take-up and use of platforms has given them more bargaining power than the investment managers.

Over a short space of time, we have seen platforms explode from a niche offering to, arguably, the default distribution mechanism for funds. This is illustrated further by the fact that most of the large platforms are now owned by large financial services groups.

Is technology the answer?

Only a handful of firms have embraced IT as a core part of their delivery mechanisms so far. The FCA is keen to encourage the development and use of FinTech, particularly when it is used to improve results for customers or to reduce regulatory costs through Project Innovate and the Regulatory Sandbox. However, judging from what we have read so far about the participants in both these initiatives, there is still an evident imbalance between the practitioner and the technician. If a set of product packages is to be truly successful, both must act in equilibrium.

It is therefore hard to see technology as the panacea that some have proclaimed it to be. It is more likely to function as an enabling mechanism, solving some (but not all) of the problems of the advice market and making firms operate more efficiently and/or consistently.

* Phil Deeks can be reached on 0203 772 7230 or at hello@tcc.group

 

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