2nd February 2015

Cutting the Gordian knot

Over 65% of consumers in a recent major survey on the new pension changes* had no idea what income drawdown is and only 20% with a DC pot said they knew what a marginal tax rate is!

This is no surprise to me, as virtually everyone I know who is not involved in Financial Services views Pensions as a complex mystery and with an increasing level of distrust.

This consumer confusion is coupled with a profession some believe is not yet ready to take advantage of the many opportunities offered by changing demographics, technology and pensions legislation.

This is largely because despite RDR, many businesses have not yet evolved the proposition and charging structures that can deliver a sustainable business model for the future.

The facts speak for themselves:

• 27% of small to medium sized firms offer an hourly charging structure and only 39% offer a fixed fee model **
• By 2017 the average adviser expects to have only 25% of all revenue from fixed fees **.

The research highlights to me that a significant number of advisers still have difficulty being perceived as offering pure advice. They are far happier wrapping their services and remuneration together with a product then using this as the vehicle for their payment.

This situation is understandable given that our profession was built on commission. It is difficult but not impossible to change and evolve, and it looks very likely that this may be driven by the regulator.

Martin Wheatley has a vision of a profession that offers a tangible service for a transparent fee. The FCA under his watch will now begin to look closely at how advisers are remunerated. They will not focus at first that deeply on initial charging. This is because the work involved is usually very transparent and consumers are still happier to pay an initial percentage of their investment as an alternative to a flat or hourly fee.  The FCA will more likely concentrate on the ongoing service that clients are receiving or in a number of occasions not receiving, for a percentage of their assets under influence.

Our profession faces great opportunities and many challenges but these can be exploited and overcome. I am reminded of the story of the Gordian knot. Alexander the Great had conquered all of Greece and was contemplating marching on Asia, when he faced the fabled Gordian knot which could not be untied by any man. It was foretold that anyone who could would be king of Asia.  Many had tried in vain to unravel the century’s old conundrum, but Alexander took decisive action. He slashed with his sword untying the knot and the rest we know is history.

Too many businesses are trying to adapt to the future by operating and thinking the way they have always done. Strategically they are standing still and that is the fastest way to go backwards in a rapidly changing world.

The winners of the future need to slash through their own Gordian knot then consider and have answers to the following questions:

Will your business be involved in the new opportunities, if so how deeply?

How robust is your plan to exploit these opportunities?

Which clients will you focus your attention on?

What services will you offer?

How will you be remunerated and how will you satisfy the concerns of the regulator?

Over the next few weeks I am going to highlight how you can answer each question and build a plan for the future. Look out for the next article on business vision. 

John Joe McGinley

Head of Glassagh Consulting

Sources * ICL UK Poll 2014 ** NMG 2014 

Pensions