Counting the cost

After the UK Treasury select committee recommended in July a one-year delay implementing the retail distribution review (RDR), cautioning a potential ‘stampede’ of advisers from the investment industry, it’s easy to see that the road to 1 January 2013 may be anything but smooth. A casual glance at the financial press shows plenty to stir concern; the same Treasury select committee recommending an ‘opt out’ option for high-net-worth (HNW) clients, more than 50 IFAs that actively downsized staff numbers, and lingering questions over how beneficial the review will genuinely be for client choice.

Numbers’ game

A significant amount has already been written about RDR, its implementation and the effects it will have on clients and the investment industry as a whole. Although one area that has yet to be examined is the direct impact RDR ?will have on the number of advisers ?who choose to – or are able to – ?remain in the industry.

On the face of it, the numbers being bandied around are relatively reassuring. Forty-nine per cent of advisers are already qualified to the correct level and “at least 82 per cent expect to remain as retail investment advisers” (WealthNet, July 2011). So far so good. However, if we turn those figures around it suggests that we could expect up to an 18 per cent reduction in the overall advisory workforce. That’s huge. Even if we assume that 82 per cent of advisers genuinely do want to remain in the industry, it still doesn’t take into account the fact that a proportion of the 51 per cent who are yet to take the exams may not make the grade or indeed want to remain in the industry at all.

Putting aside for a moment the employment law ramifications of dealing with staff who have failed to qualify to the new standards, there remains a not insignificant number of highly experienced IFAs and senior advisers who – given their vintage – were ‘grandfathered’ into their current roles and likely last took a written exam when they were at school. Will these individuals really be motivated and able to put in the 400 hours of study to achieve the minimum level four qualification prescribed by the FSA? It would be easy to see a gentler path might lie in selling up one’s assets and taking an earlier retirement. Reinforcing this, a number of specialist broker firms have sprung up expressly to assist in the sale of smaller IFA firms and their assets.

Action stations

What can firms do with individuals who don’t qualify? Larger IFAs will have the option of moving staff into non-advisory roles, but it’s easy to envisage how difficult it would be to retain senior individuals in that scenario. Smaller firms simply won’t be able to accommodate advisers who cease to be able to fulfil their roles. Moving someone senior into a ‘paid introducer’ type role is a possibility, but fraught with concern from a compliance perspective – could an informal comment potentially be construed as advice? Will senior individuals who don’t qualify simply choose to leave, or will firms be presented with the difficult task of managing them out?

According to an article posted on the Money Marketing website, the number of IFAs in the UK in 2009 was estimated to be around 21,000. So let’s take a dim view of the numbers and ask where the industry is going to make up a potential shortfall of around 3,700 client-facing staff? Without significant, imaginative hiring strategies, it’s hard to envisage how this gap will be satisfactorily bridged. Even looking at new research from Aviva (https://www.ifamagazine.com/article/496/aviva-predicts-smaller-rdr-exodus), which predicts only seven per cent leaving the industry, that’s still almost 1,500 advisers.

Larger institutions already have on-going hiring needs which they struggle to meet due to the paucity of appropriately qualified and experienced client advisers in the UK marketplace. Add into this a need to cover significant attrition connected to RDR and you’re left with a major human capital headache.

The senior manager of an ultra-high-net-worth (UHNW) team recently suggested to me that looking outside the industry at widespread lateral hiring might be one answer. Attracting experienced individuals from related industries into financial services is not a new approach – at least one major IFA has had a programme of this type for some time – but one might take the view that this replaces an intake of new graduates with one of senior-level professionals who are making comprehensive career changes. Is this really going to do the job?

Taking the individual adviser’s viewpoint, there clearly may be benefits in the reduction of overall adviser numbers. If you’re qualified at the right level you will be an increasingly valuable commodity and thus potentially able to command appropriately increased compensation. That said, firms are unlikely to want to be put over a barrel by advisers who believe that just holding the qualification is grounds enough for an uptick in salary. Retention for firms will likely be a big issue – hitting the right balance between compensating fairly and feeling that you’re just paying for loyalty is always hard. Add into the mix the increased difficulty in hiring the right level of qualified adviser and you’ll have firms ready to pay over the odds to hit their hiring numbers, which can only lead to skewed internal compensation figures – an HR nightmare. Institutions wishing to retain fully qualified staff will have to think long and hard about what measures can be put in place to ensure loyalty. Above and beyond salary and bonus compensation, firms need to be asking themselves how attractive they are to work for, and what they can do to be proactive about likely attempts by rival firms to tempt away advisers.

New direction

Major firms with mass-affluent businesses may feel that the fee-paying model is beyond the reach of their clients and may consequently pare down their adviser teams; offering fewer products and ensuring that future hires need not be as technically capable. This clearly runs the risk of staff feeling automatically downgraded if they don’t qualify and are moved into a perceived ‘lesser’ role.

Other firms may go in the opposite direction and revise (or indeed implement) minimum investment size criteria to ensure that their valued advisers are focusing on the larger and potentially more complex/lucrative client. This route makes best use of the advisers’ qualifications while downsizing the overall number of client accounts. Highly experienced advisers with long-term client relationships will be unlikely to embrace being dictated to about letting go of some of their oldest accounts, however.

My sense is that larger firms with more significant hiring budgets will benefit overall from the imbalance likely created across the marketplace. With deeper pockets and greater latitude to hire, they will be able to move quickly and forcefully to snap up advisers left dissatisfied by changes and upheavals within their own firms. Boutique firms will need to consider long-term incentive plans – including equity ownership – to bolster their attractiveness, both to new and ?existing staff. n

Lyssa Barber is a managing consultant and head of private wealth management at global recruitment consultants Allemby Hunt