14th February 2011

K.I.S.S, RDR and the “Profession” thing.

This acronym was coined by Kelly Johnson, lead engineer at the famous Lockhead Skunk Works.

Whilst today it translates as 'Keep it simple stupid', the principle is best illustrated by the story of Johnson handing a team of design engineers a handful of tools, with the challenge that the jet aircraft they were designing must be repairable by an average mechanic in the field under combat conditions with only these tools.

Hence, the 'stupid' refers to the relationship between the way things break and the sophistication available to fix them.

As a country the UK has moved away from the manufacture of goods and products and has moved toward the manufacture and provision of intangible goods and services.

It is a fact that any business that “designs and manufactures” products has done so because it has identified a consumer need and in doing so then needs to create awareness and find a way of getting it distributed- that means finding a sales force.

Financial services are often referred to as an industry, seldom linked to a Profession, until the RDR arrived. The FS industry is made up of many different provider “manufacturers” large and small. They have all designed often very similar intangible products to address a vast array of perceived financial needs for both personal and corporate consumption.

And yes, they need somebody to sell these products, and yes, like in any industry the sales process needs to be incentivised. That incentivisation is in the form of financial reward. The buyer has a choice based upon a myriad of factors to buy or not.

This is not a difficult theory to understand and these same firms will need people to distribute (sell) products post RDR but with the added bonus or burden of not paying for the incentivisation.

The FSA is intent on changing the face of financial services in terms of qualifications, standards, remuneration and creating a greater degree of perceived professionalism. In doing so it is removing the word sale and replacing it with advice. Many of the RDR thought processes are not without substance or benefit. After all to improve knowledge demonstrated by exam, standards and create an aura IFA professionalism is laudable.

But, by doing so in the way suggested blurs the lines between the wish to create the “Professional IFA” and the distribution of FS products as part of the offering and that is where I believe the whole RDR process starts to go “wobbly”.

A definition of a profession is a vocation founded upon specialised educational training, the purpose of which is to supply ‘disinterested counsel’ and services to others, for a direct and definite compensation (reward) and wholly apart from expectation of other business gain.

In other words the “Professional” provides the advice but does not “dirty their hands” with arranging the purchases of products or goods that may attach to that process of ‘disinterested counsel’. KISS in fact.

This “Professional” status historically applied to divinity, medicine and the law. Although most professions enjoy high status and public prestige, not all professionals earn high salaries, and even within specific professions there exist significant inequalities of compensation.

Today the spectrum of professions is broad indeed from Architects and Accountants to Teachers to Social Workers and shortly if the FSA wish is granted Financial Advisers will be added to the list.

So, if we examine more deeply the view that the “purpose of a profession is to supply disinterested counsel and service to others” we note that the word “product” is missing and that is why we have the RDR conundrum.

Why? Because by putting the distribution of products into the same place as creating a fee based profession means a conflict of interest.

Where “counsel” or advice sits alongside the distribution of a product, tangible or intangible you have a problem. Solicitors, accountants, surgeons, and many other professions that the FSA would like to see financial advisers compared to do not deal in product.

Their expertise is by way of applying analysis to a set of problems and coming up with an intellectually based solution or plan, often of their own unique bespoke design, as a result of qualification, experience and training then putting that solution or plan in place. They will not normally get involved in the execution or influencing of purchasing product as an integral part of that process.

Professions do not operate in mass markets with a view to assisting manufacturers in the distribution of their product. Professions do not normally sell or arrange the purchase of substantive goods or products.

Because financial services institutions derive revenues and profit resulting from mass-market product distribution the idea of creating a profession that is involved directly or indirectly in financial services product distribution too is quite incompatible.

So what of the RDR in light of this scenario?

I think that there are three simple divisions and responsibilities to consider as key building blocks

1. The professional IFA qualification level should come with very clear financial planning module speciality areas of expertise and restrictions including no product distribution. Services are purely fee based leaving the client to carry out any required product transaction themselves or via an independent third party firm regulated to recommend the “product manufacturer” and arrange the product requirements for an agreed reward- commission or fee.
2. Those who choose not to “graduate” to professional IFA qualification level cannot position themselves as such. They can position themselves as whole of market independent distributors of “packaged” products manufactured by regulated institutions on a fee or commission basis.
3. All manufacturers of financial services products should be required to have the product they “manufacture” certified or licensed as fit for use in a clearly defined set of financial planning circumstances and licenced accordingly- by the regulator.

The outcome of this would be that the upper end of the market would be well served by specialist firms not influenced by product execution in any way whose clients are able and willing to pay fees.

Those not able to afford fees will know that independent advice is available and know the cost for advice can be wrapped up in a recommended or sold packaged product that has been deemed fit for that purpose by the regulator.

The regulator would carry responsibility for what it is regulating, unlike today and we would see an end to the possibility of inappropriate or faulty products being sold for the wrong reasons to the wrong people. After all it seems crazy that in today’s regulatory world, regulated products, funds and schemes are not licensed as fit for a particular purpose and instead deemed unfit for purpose after the event.

Regulatory costs would reduce as a result and blame plus the resulting redress for bad advice, product design, sales processes or regulation can be laid at the correct door.

Regulation should be more about foresight and less about hindsight. It should separate advice and product. This may be a simplistic view that is at least worth a discussion, but KISS seems a pretty relevant acronym to use for an RDR route map today?

FSA/FCA, RDR, Panacea Comment