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Practice Management

Imagine how your current practice would need to change to comply with new regulations similar to the United Kingdom's: demanding fee and service transparency, banning commissions on investment products, and raising advisors’ level of professionalism.

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).
 

Regulations that took effect on December 31, 2012, radically changed the way U.K. advisors make money, structure their business, acquire licensing, and more. But don't stop reading just because these new rules don't affect you personally: I think they offer some important guidance about both the future of our profession and the future of your practice.

Perhaps the most dramatic change is the ban of commissions for advised retail investment products. (The new rules do not affect commissions on insurance products or group pensions.) As of January 1, 2013, British advisors must also disclose and charge clients separately for advice.

Advisors also must identify their services as being in one of three categories: independent, restricted, or simplified. Independent advisors must have access to any and all financial products or solutions that would be suitable for their client base. Restricted services offer access only to a limited range of products; these advisors need to describe the scope of their advice and clearly explain their services, pricing, and value. Simplified services include low-complexity products and very limited advice for people with simple needs.

Other Rules
An interesting aspect of the fee process is that firms that provide advice alone need to charge value-added tax (currently 20%) to clients, while those who implement, review, and monitor a client's assets do not have to charge this tax. So, say an advisor follows these stages of planning:

  • Gathers data;
  • Analyzes and finds suitable investment options;
  • Provides client with reports, financial health checkups and forecasts;
  • Recommends specific investment products;
  • Acts between the client and intermediary to arrange the purchase of the products; and
  • Provides ongoing review service to ensure that the products still meet the clients' needs.

Advisors then who provide all these services are exempt from charging a value-added tax, but advisors who provide only the first four must charge clients the tax.

Further, U.K. advisors must now have a higher-education diploma and complete 35 hours of continuing education annually. They also must obtain an annual statement of professional standing from an accredited body that certifies that they meet the new requirements. This certification would also disclose any regulated activities, such as dealing in securities or derivatives, and list an advisor's educational qualifications. (Advisors who do not have a diploma may take courses over time to catch up.)

In order to be eligible for an organization's certification, a practitioner must be a member of the organization and adhere to its code of ethics.

Exodus Expected
The new rules also include a phased-in capital requirement equal to 25% of a firm's annual operating expenses; full implementation is due by December 2015.

These requirements are expected to substantially change the financial services industry in the United Kingdom. In fact, Britain's Financial Services Authority has predicted that up to 25% of financial advisors will leave the profession by the end of the year. A representative of the authority told me that the average advisor in the United Kingdom is in his fifties and has been working in the industry for nearly 30 years (sound familiar?); many advisors will choose not to reinvent their practices to focus on advice rather than products.

It's important to note that the United Kingdom is not the only country developing such regulations for financial services practitioners. Australia, for example, last year rolled out a ban on "conflicted remuneration," saying that advisors providing financial product advice to clients can only receive remuneration from their clients. (We'd call that fee-only.) The Netherlands, Hong Kong, and India are all following suit.

Hypothetical Changes
Here's an exercise: Imagine how your current practice would need to change in the face of new regulations similar to those in the United Kingdom: demanding fee and service transparency, banning commissions on investment products, and raising the level of professionalism of investment advisors.

You'd then need to consider several aspects of your business. For example, charging for advice: If you are not already charging for advice, you would need to. That means separating your advice from execution and being able to demonstrate your value to clients clearly. It also means having a dedicated pricing structure that takes into account the costs to deliver your services, while factoring in your expected profit margin.

You'd then need to strategize on how you get your clients, how they find value in what you do, and whether they will happily pay for your services. You would want to segment your current client base, specifically identifying your relationships by complexity of advice and profitability. You likely would need to develop a new service mix, creating levels of services and activities that you will perform for different segments of your clients.

Because of the new fee arrangement, you will probably need to prune your current client base for unprofitable relationships. You'll look toward wealthier clients or develop a system for managing multiple small accounts in order to keep up your income levels.

Further, you'll need to get smarter about using technology and integrating many of your back-office activities as profitability takes center stage. Standardized processes could help you streamline both service and support.

If you want to be considered independent, you'll need to ensure that you have access to all investment solutions that would fit your client base. That means you will probably want to develop an optimum client description and focus your marketing efforts on those prospects.

You would also need a platform that would allow you access to all the products you'd need. For certification, you would need to prove to an organizational body that you truly give independent advice.

Don't have a college degree? That could be a problem. Also, 35 hours of continuing education is a high bar: Even if you are already a certified financial planner, that's more than double your current requirement.

Reality Check
Now think about this: The United States has been a leader in the development of financial planning and investment advisory services, but it isn't any longer. Given the global nature of the financial services industry, I don't believe we can sustain our current advisory services system into the future.

I believe that change is coming, and we'd be wise to take an active role in helping to design our changes rather than having them developed by people who don't know our business models or our clients.

Look back now at the picture I've painted for the future. Most of these changes would actually be good business practices for today, independent of the way you get paid. These strategic decisions will help you create value for your clients, demonstrate your professionalism, and improve your bottom line.

I believe that professionalism is paramount; we're no longer sales-driven but solution-driven. We're advisors, counselors, and planners who develop sound financial futures for our clients. Aren't we?


Deena Katz, CFP, is a Financial Planning columnist and an associate professor of personal financial planning at Texas Tech University. She also is chairwoman of Evensky & Katz, an advisory firm in Coral Gables, Florida.

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