There has been an increasing amount of press coverage about how the Insurance Distribution Directive (IDD), Packaged Retail and Insurance-based Investment Products (Priips) directive, Markets in Financial Instruments Directive (Mifid II) and the new Legal Entity Identifier (LEI) will affect financial advice from the New Year.
This was a panel discussion at the recent International Adviser Future Advisory Forum Europe in September.
Similar regulation is now being applied outside of the EU in areas such as the Middle East, Far East and recently South Africa.
A clear opportunity
At the conference, I overhead a number of conversations that voiced concerns as to how this would affect business going forward. What struck me was that advisers in these jurisdictions will all be in the same boat and the playing field should be quite level going forward.
A positive mindset and a good business plan should help firms adapt to the new environment and avoid the hurricane that will inevitably wipe out those that don’t or won’t move with the times.
And throughout this period of significant industry change, clients will still need the three Ps:
- Protection of income – disability/critical illness insurance;
- Protection against the loss of the breadwinner – life insurance; and,
- Protection of income in retirement – investments, savings and pension planning.
If a potential client thinks this new transparency is somehow more expensive, it’s not as if they can go to a competitor, as other firms in that jurisdiction will also be subject to the same transparency requirements.
So the firms that better communicate the reasons for the fees, and the added value that advice can offer, are going to be the ones that flourish.
I believe this is the start of the move to a profession that should benefit the advice firms and the clients.
Avoiding Transparency
There have been suggestions that some adviser firms will try to avoid regulation and transparency of fees and charges.
David Kneeshaw of RL360° raised such concerns at the IA event, saying: “It’s my job, among others, to convince advisers that [they should embrace the change] rather than cutting and running to dodgy jurisdictions.”
If some adviser firms do indeed choose such a route, expanding regulation and enforcement is inevitably going to mean those firms will drive their businesses into a cul-de-sac with no reverse gear. Those business models are going to struggle to survive over the longer term.
Sale and service
For anyone who has bought a new car, the following analogy may perhaps put the move from sales to advice into perspective.
We go to the car showroom and meet the salesperson who is looking to make a sale. We know they will get commission, but do not care how much that commission will be if the deal is a good one and we like the car.
I believe a lot of the public still think of advisers as “just salespeople“ and the new regulations may start to finally change this perception.
The next visit to the showroom is entirely different, this is the first car service. This time we deal with the servicing department and you can bet that all of us check the bill to look at the cost of parts and particularly the labour costs. There are no hidden costs or charges, they are all spelt out on the bill.
We have all done the sharp intake of breath and asked: “How much for the labour?”
You can be sure that we will question anything on the bill that we do not understand. The costs then have to be justified, a professional garage does this successfully and then we pay the bill. We know we need to pay the bill as the car has to be fit for purpose.
What is more, we return for the annual service and we pay again. We have become satisfied clients of the garage.
The above scenario demonstrates that we value the professional service offered by the garage and see this as a necessary ongoing cost.
The parallels, as far as I see it, with financial advice are clear. All firms have their unique selling points, whether that be licences, qualifications, specialist expertise and experience.
The key is for firms to give these USPs a value and communicate the added value, over and above the cost of advice, to the potential client when the client says “How much?”
Once the potential client understands why these fees are payable, and the added value provided they will pay. And, just as in the scenario painted above, you can be sure they will be back for the annual service.
