Its implementation has, to an extent, made quality independent advice to the middle classes and mass affluent sectors a thing of that past. Governments and regulators worldwide, in the pursuit of protecting the most vulnerable investors, have removed choice – and it could be argued healthy competition too – with the loss of the pricing model that the vast majority of clients were happy with. It is also arguable whether the wider public has been well served.
Nonetheless in the wake of the 2008 crisis, regulators across the globe have been moving to tighten regulations in order to improve customer protection, using tools to ensure appropriate transparency, protection and the provision of perceived best and unbiased advice. Financial services companies, in order to ensure compliance and the demonstration of good corporate governance, are reportedly spending up to 8% of their annual budgets in these areas – something of which the independents should take note.
So where does this leave the shrinking band of international financial advisory firms? In the EU, for example, levels of regulatory reporting and governance requirements, whether passporting or establishing, are already proving costly. This is compounded by the fact that some international insurers are removing themselves from the market because they cannot afford to make the product changes needed for their plans to be sold, as the individual changes in so many EU countries makes the plans non-viable from a cost perspective.
The domestication of cross border products to comply with local conduct of business rules and product structure requirements can make competing with local insurers again non-viable. No one seems to care whether this suits the needs of transient clients’ working across borders in Europe and elsewhere.
Similarly, in the international independent advisory strongholds of the UAE, Singapore and Hong Kong operating cost are scaling up.
Many small to medium sized advisory firms who have very much relied on the support of product advisers to do most of the theory administration for them will in the end be forced to take on more and more cost to satisfy local regulators. The traditional commission based business model that used to attract salespeople will crumble away under the cost and regulatory pressures, providers will also start to move away from them in fear of becoming regulatory targets as they start to implode.
Providers seem unwilling to learn the hard lesson that once the distributor has disappeared the client has only them to turn to and is highly likely to have the support of the local regulator in any dispute. It is for these reasons that size matters in our industry.
The Hargreaves model
The Hargreaves Lansdown model is, in my opinion, a great illustration of this point. It is a good example of an advisory firm which has recognised and understood that in order to support its clients appropriately, substantial investment is required in terms of administration, IT, governance and compliance, amongst other factors, to ensure that they comply while supporting their clients with appropriate products and services.
The Hargreaves Lansdown model could be used for larger international advisers to get more grips on the business value chain and exploit the opportunities that exist.
Sadly, small to medium sized advisory firms in the primary international markets simply do not have the infrastructure, expertise or ability to respond to these business challenges; only the substantial ones will survive in this environment and only if they recognise and respond to the threats to their current business model.
The product providers themselves have long since recognised the fragility of the distributor market and the fear of lost opportunities has often driven them into bed with some distributors they would reel away from if local regulators required them to be more forensic or responsible in their approach to the advice given.
Providers would do well to try and value who has the size and desire to remain in this market and work closely with them to ensure there is someone around to distribute the products and services they create to the consistently growing numbers of expatriate clients around the world.
Peter Hobbs is formally the head of Generali International and currently a non-executive director of the deVere Group
