Maximising the value of an IFA relationship

What doesn’t kill you makes you stronger

IFAs understand the headwinds facing solicitors because we’ve already been there

June 2006Launch of the Retail Distribution Review

November 2007Implementation of the EU’s Market in Financial Instruments Directive (MiFID) December 2008

All retail financial services firms required to demonstrate Treating Customers Fairly principles

January 2013Investment firms must be fully compliant with RDR policy

December 2005 FSA proposes principle-based regulation

April 2009EC announces plansto improve investor protection for packaged retail investment products (PRIPs)

December 2013Minimum capital adequacy requirement for personal investment firms raised to £20,000

FTSE All-Share Index

0

500

1000

1500

2000

2500

3000

3500

4000

Jun- 05 Jun- 06 Jun- 07 Jun- 08 Jun- 09 Jun- 10

Solicitors may only refer clients to independent financial advisers

Independent financial advisers (‘IFAs’) must research the whole market before making any recommendations – and must give

clients the option of paying for their services by a fee

The evolution of financial advice

1986

Financial Services Act polarises of financial advice

2005

Financial Services Authority allows depolarisation to increase high-street choice

2012/13

Retail Distribution Review recategorises ‘retail investment advisers’

Independent Tied

Independent* Tied Multi-Tied

Independent Restricted

*must offer a fee option to be called independent – otherwise called ‘whole of market’

Retail Distribution Review – your 10-second guide

• Launched by the Financial Services Authority in 2006

• Aims to improve and modernise how investments are distributed to retail consumers in the UK

• Three main goals:1. Improve the clarity with which advisory firms describe

their services to consumers 2. Address the potential for adviser remuneration to distort

consumer outcomes 3. Increase the professional standards of investment advisers

• Firms must be compliant from end of 2012

What will it require to be an IFA post-RDR?

• From January 2013, an ‘Independent Financial Adviser’ must:– hold qualifications at a minimum level of QCF Level 4* – conduct a fair and comprehensive analysis of the relevant

marketwhen making product recommendations

– have sufficient knowledge of all types of ‘retail investment product’ that could give a suitable outcome for a client

– select products in line with the ‘client’s best interests’ rule (COB 2.1.1)

– NOT accept commission from product providers (even where rebated)

– operate a product-neutral pricing structure*Qualifications and Credit Framework

What currently constitutes QCF Level 4?(NB This list is not exhaustive – for the full list see FSA Consultation Paper CP09/31)

CFA Society of UK CFA Program Level 1,2 or 3

Chartered Insurance Institute Advanced Diploma in Financial PlanningAdvanced Financial Planning CertificateAssociate/Fellow of Chartered Insurance Institute

Chartered Financial Planner, Associate/Fellow/Member of the Life Insurance Association

Diploma in Financial Planning

Institute of Financial Planning Associate/FellowCertified Financial Planner

Chartered Institute for Securities & Investment

(formerly Securities & Investments Institute)

Certificate in Private Client Investment Advice and ManagementCISI DiplomaInvestment Advice CertificateLSA Full Membership Examinations

Masters in Wealth Management

Faculty of Actuaries/Institute of Actuaries

Associate/Fellow (post June-1994 syllabus)

London Stock Exchange Full membership examinations

Personal Finance Society Associate/Diploma/Fellow

Client asset

value

Client age20 30 40 50 60 70 80

Buy first house

Get married

Have family

Move house

Change jobs

Receive inheritance

RETIRE

Familycover

School fees planning

Mortgage/ repayment adviceConveyancing

Annual ISA purchase

Annual ISA purchase

Annual ISA purchase

Annual ISA purchase

Annual ISA purchase

Annual ISA purchase

IHT & estate planningReview trusts

Spousaltax-planningWrite Wills

Lump sum investment

Pension maximisation/consolidation

Annual portfolio review

Annual portfolio review

Annual portfolio review

Annual portfolio review

Annual portfolio review

Annual portfolio review

Annual portfolio review

Pension de-risking

Income drawdown

Arrange SIPP

Annuity purchase

Regular savings pension

Set up children’s investments & CTFs

Review WillsSet up trusts

RefinanceConveyancing

ProbateReview WillsReview trusts

Long-term careEquity release

Where do solicitor/IFA synergies lie?

1. Trust & estate planning

IFASolicitor

Will writing

Trust creation& administration*

Probate

Estate disputes

Portfolio construction

Balancing interests

Inheritance tax planning

Ethical investing

(e.g. for charities)

Remember: The Trustee Act 2000 obliges trustees to review any investments made with trust money on a regular basis and to obtain proper investment advice. * NB: Where acting as trustees, solicitors should not refer trust work to businesses in which they have an

interest

Where do solicitor/IFA synergies lie?2. High-net worth clients

Trusts & asset protection

Estate management

Pre-nuptial agreements

Corporate asset structuring

Wealth management

Alternative investing

School fees planning

Tax-efficient planning

Pension planning

Insurance

IFASolicitor

Where do solicitor/IFA synergies lie?3. Elder care planning

Power of Attorney

Trusts

Will-writing

Equity release guidance

Long-term care insurance

Equity release product selection

Impaired annuities

Income solutionsRemember: Only financial advisers that hold the CF8 Long-term Care Insurance qualification can advise on long-term care products

IFASolicitor

Where do solicitor/IFA synergies lie?4. Personal injury and divorce settlements

Litigation

Claims settlement

Award assessment

Trust creation & administration

Lifetime income planning

Tax planning

Family financial planning

Pension planning

Insurance

IFASolicitor

Where do solicitor/IFA synergies lie?5. Corporate & employer services

Employment law

Corporate structure

Client/supplier contracts

Intellectual property

Selling/insolvency

Employer & group pensions

Employee benefits & share schemes

Workplace/director financial planning

Insurance

Remember: From 2012, employers will be required to enrol all eligible employees into a qualifying workplace-based pension scheme

IFASolicitor

Using knowledge of our clients to build and enhance our businesses• Enables firms to both meet regulatory compliance requirements and build better businesses

• Requires client information to be shared across the business and not kept to one adviser/partner

• Technology essential to ensure data is up-to-date and easy to interrogate

1. Client Fact Find

Deep-dive knowledge of every client

2. Sales Management Information

A real-time picture of a business

3. Client segmentation

Build a business around genuine client needs

Client Fact Find

0

10

20

30

40

50

60

70

80

Pensions ISAs Bonds Cash Funds Other

1. The Client Fact Find – a power-store of information

IFAs are required to take reasonable steps to ensure that a recommendation is suitable for a client. Before making recommendations or managing investments, an advisory firm must obtain and document the necessary information regarding:

• Client’s financial situation – including- source and extent of regular income- regular financial commitments- assets, including liquid assets, investments and property

• Client’s investment objectives – including:- length of time for investment- preferences for risk-taking- risk profile- purpose of the investment

• Client’s relevant knowledge and experience – including- familiarity with relevant services, transactions and investments- nature, volume and frequency of transactions- level of education and profession

Taken from FSA Conduct of Business Sourcebook Section 9.2

Client Fact Find

The Client Fact Find - maximising the advice opportunity

Client Fact Find

Client assetsAre these all properly balanced with a cohesive strategy?

Dependants and spousesAre all personal and investment allowances maximised across the whole family?

Pension arrangementsAre all these optimised in terms of performance, charging structure and ease of management?

Risk profileIs the current portfolio aligned with the client’s stated risk profile and preferences?

Time horizonsAre investment strategies appropriate to the time left available for investment? (ongoing review)

Turning a regulatory requirement into a commercial and client advantage

Financial commitmentsAre assets and liabilities being offset as efficiently as possible?

The Client Fact Find (cont.) – using it to target solicitor issues

Client Fact Find

EstatesAre there any assets to be passed onto a dependant/ family member. How are these currently protected?

WillsHave wills been written by the individual and their partner and are these up-to-date (e.g. post-divorce or birth)

With client approval, IFAs can share fact finds with solicitors, thereby providing them with regular and

comprehensive client information

Elder careDoes the individual have any obligation to any older relatives – how are their future needs managed?

TransactionsDoes the individual face any imminent property, business or commercial transactions?

Management information (MI) – a further tool to build a picture of a business and its clients

• Level of client activity including most recent transactions

• Client activity by adviser/office/whole business

• Clients with unused ISA and pension allowances

• Investment asset allocation by client/adviser/whole business

• Assets held per provider provider/investment group/product

• Gross and net asset inflows/outflows

• Monthly/quarterly/annual revenues by client/adviser/office

• Client bank by age/AUA*/professional profile

• Transfer activity from/to other advisers/providers

• Length of client retention

*Assets under advice

Assess individual adviser

performance

Leverage client data across the whole business

Be alerted to sudden outflows of business

Identify potential risks

(e.g. high client exposure to high risk

assets)

IFAs use software and investment-platform tools to maintain a real-time picture of

Track profitability by

client/ adviser/office

0

10

20

30

40

50

60

70

80

Pensions ISAs Bonds Cash Funds Other

Client segmentation – improve profitability, anticipate future business direction and give clients what they need

Use the client fact find and business MI to segment & cross-segment clients by:

Age

Asset level/profitability

Transaction frequency/objective/key concern

Financial behaviour/portfolio complexity

Professional profile

1. Anticipate future needs across the whole client bank accurately and position business accordingly

2. Increase retention of high-quality/high-value clients and increase referral of new ones

3. Deploy resources efficiently to each area of financial planning and each client type

4. Identify and build key areas of expertise to build clear proposition, culture and brand

5. Ensure each client pays fairly for the service they require (i.e. no cross-subsidies)

Which in turn allows us to:

Anticipate client needs

by life stageIdentify current and futurehigh net worth clients

Differentiate advice services/ marketing/communicationsby individual client needs

This enables us to:

Segmentation in actionFor example, client profiling may tell us:

30% of our clients are professionals in their 30s-50s with fast-accumulating portfolios

10% of our clients are annual ISA buyers with few other assets with us

40% of our clients are over 60 with portfolios of £400,000+

Our key client segments are:1. Young accumulators:- Provide tax-efficient, growth

focused strategies- Keep up to date with new

investment opportunities and ideas

- Focus on online servicing- Address life-stage financial

planning

2. High-net-worth retirees- High touch relationship with

focus on regular face-to-face contact

- Focus on tax and estate-planning

- Income and risk-averse strategies

- Strong potential for client referral – including from family members

3. Transactional investors- Focus on efficient but low-

cost servicing- Email with investment ideas

and stock market commentary- Invite for portfolio review

and assess consolidation potential

What can fact finds, MI and segmentation tell you about your business?

What is the age distribution of your clients – how is this changing over time?

What is the ratio of personal to corporate clients (by numbers, by revenue share)?

What are the growing and declining areas of activity?

Which areas are seeing high levels of client referral?

What is the distribution of your clients by frequency of contact (e.g. every quarter, every year, every five years?)

Have you enough younger clients to sustain future growth?

Are you overly reliant on a few large clients or well diversified?

Where do you need to deploy resources?

Which areas are proving your greatest strength and known area of competence?

Does your servicing reflect the value of each client – how can you encourage more contact from less active clients ?

Other potential joint activities

Client mailings & newsletters, emails

• Budget updates

• End of tax year ISA and pension reminders

• Stock market reviews & model portfolios

• Best buy savings accounts

• Personalised portfolio reports and valuations

Client & prospect seminars

• Planning for a secure retirement

• Managing a divorce

• Funding old-age care

• Passing on your estate

• Asset protection (HNWIs)

Workplace marketing

• Getting the most from your pension

• Employee share schemes

• Life-after-work planning

• Wealth management for directors

Client reports: Example– Investment Portfolio Management

Client reports: Example – Risk Analysis

Client reports: Example- Montecarlo Simulation (Probability Modelling)

Benefits of a joint-venture (JV) structure for financial planning

• If the JV is an Appointed Representative of the IFA firm, the IFA firm will carry front-line responsibility for compliance with FSA requirements

• Solicitor participants can receive dividends provided the JV operates on a fee basis and accounts to clients for any commissions received

• The JV can use the IFA firm’s existing staff, compliance and business management systems but must ring-fence the clients of the JV - and revenue from them - within the system

• JV can be structured as a limited company or a limited liability partnership (tax considerations will normally dictate the appropriate structure)

• Offers flexibility over equity structure and profit share

What’s in it for solicitors?

1.Reinforce long-term high-value high quality client relationships

2.Attract more clients within your preferred market segment(s)

3.Improve levels of client referral

4.Increase levels of business from existing clients

5.Maximise efficiency and profitability

6.Build a holistic advice proposition

Transform threats to the legal sector into opportunities- The forthcoming changes are a welcome reminder of the need to change in a positive manner.