Tim Sargisson: Three critical issues for empire builders

Tim Sargisson highlights three concerns he believes should be viewed as critically important by any financial advice firm whose business model might put it in the category of ’empire builders’

Another month, another conference – this time, Platforum and its Annual Investment Retail Conference, superbly organised by Heather Hopkins and her team and chaired by Peter Mann.

Platforum has been looking into the inner workings of advice businesses to think about what models may emerge in the future as the adviser market continues to develop in a post-RDR and post-pension freedom landscape.

The company came up with two profiles it viewed as compelling models – one it calls ‘empire builders’ and the other ‘nurturers’. Held up as an example of an ‘empire builder’, I was asked to talk about three concerns we see as being critically important and which influence how Sandringham is transforming the business of advice.

Concern number one is scale and the need for scale in our industry. Businesses exist to exploit the benefits of being big and to maximise efficiency through economies of scale. It is a plain fact, the bigger a company gets, the more experience it accumulates and the trick is to use that experience to improve performance – in particular when it comes to costs. Efficiencies of scale is about ensuring every £1 of additional revenue earned does not equate to £1 of extra cost.

The second concern is about dealing with change. The biggest challenge for any CEO of an organisation is to recognise the world is changing and respond. Businesses who fail usually go bust or, having recognised their model is not adaptable, pack up their tent and go home.

Over the last three decades our industry has been transformed. The breadth of this change has led to the demise of the adviser workforce, with 90% fewer advisers compared with 30 years ago and adviser numbers down from 300,000 to close to 25,000 today.

We all understand this as the impact of the costs and the burden of increased regulation. But to understand the future is surely to appreciate the trend will be in the opposite direction? The change will see adviser numbers increasing.

It is, perhaps. counterintuitive not to see robo-advice per se as a threat. We understand the allure of robo-advice and its ability to streamline, remove friction and, with it, costs. But we expect robo-advice firms will continue to lose money for their investors because all that IT is expensive and these firms lack distribution. Providing financial solutions for clients is lumpy and there is very little ‘one size fits all’ solution at the higher end of the market where we all want to position our businesses.

Computers cannot do the ‘deep-dive’ to engage with consumers in a meaningful way and there is still a clear demand for investments to be professionally managed, because wealthy clients lack expertise and time. This in turn means the demand for advice will rise if advisers can prove how they can safeguard income in retirement.

Managing risk

My third concern is the management of risk and the fact there is still insufficient focus on risk and risk management in our industry. One key risk for the consumer is how a firm sets up its investment service. The words ‘independent’ or ‘restricted’ are no more than labels that, while exciting many people in the industry, do little to support customer engagement, fail to resonate with the customer and, if anything, only serve to confuse.

Advisers cannot predict future investment returns. The requirement instead is to concentrate on getting the basics of investment right and to remove as much of the uncertainty around investment selection as possible. The essence of investment management is about the management of risk, not the management of returns.

Continuing the theme of risk, we should all be deeply concerned when we read the FCA believes 53% of defined benefit transfers are unclear or unsuitable and we all know where this analysis leads in terms of financial redress and reputational damage.

Scale extends to employing external experts to run the rule over processes to ensure they are fit for purpose – with a view to to better understanding and managing risk so as to protect the customer, protect the firm and protect the broader industry from the financial burden in getting it wrong. After all surely that is what the twin requirements of good governance and oversight demand?

Published on the 17th October 2017