By: Jaco van Tonder, Director of Advisory Services
Many a debate in the advisor community over the past year centred on the intention of the FSB’s Retail Distribution Review (RDR) consultation paper to regulate when advisors can refer to themselves as being “independent”. This debate very closely mimics a similar debate in the UK, where the Financial Conduct Authority (FCA) has formulated minimum requirements for advisor firms who refer to themselves as “independent” advisors.
As an active participant in these lively (and at times emotional) debates, it struck us a few months ago that we could all be missing a key point here. We should look at the “independence” debate not from an advisor’s perspective, but from the perspective of the end client. What question is a client really asking when they want to know whether an advisor firm is “independent”? In this article we would like to introduce what we believe this question really means: “Is the culture of your organisation that of an advice-led firm, or are you a product-led firm?”
Product-led firms prioritise distribution whereas advice-led firms prioritise clients
If you are a financial advisor, how do you figure out whether the essence of your practice is advice-led or product-led? Since culture is difficult to measure, the simplest way is to look for a number of character traits of typical advice-led firms.
In our experience advice-led firms:
- Typically have their origins in the advice industry as opposed to the product manufacturing industry.
- Have a senior leadership team dominated by staff with a history in the advice industry.
- Produce the majority of their shareholder returns from advice fees, and not product fees.
- When confronted with a difficult decision that affects shareholders and clients, prioritise client needs over shareholder needs.
On the other hand product-led firms:
- Typically started off as product manufacturing businesses, and added an advice capability to the business later.
- Have a senior leadership team with a history in product manufacturing.
- Produce the bulk of their shareholder returns from product construction fees.
- When confronted with a difficult business decision affecting shareholders and clients, typically prioritise shareholder needs.
Why is this debate more important than “independence”?
The debate about advice-led versus product-led is not a new one, and can be traced as far back as the 1980s in South Africa with the competition between tied and independent insurance advisors.
The debate has been raging in the UK, USA and Australia again recently, as professional advice regulation burdens advisor practices with hugely increased regulatory compliance costs. A number of advisors are therefore considering various product-led advice models as a way to generate additional revenue from existing clients. Vertically integrated value propositions (where advice and product get bundled together) are also increasingly popular options investigated by advisors. But there is some concern that advisors are underestimating how the change to a product-led business model can fundamentally alter the culture of their business over time, both for their staff as well as their clients.
Be clear about where your business is today, and where it is heading
Weighing your business on the scale of advice-led versus product-led can be an enlightening experience for an advisor firm, and it sheds light on how your business is experienced by your clients. It is difficult to argue that the advice-led model is objectively better than the product-led business model, or vice versa. But there are huge differences between these two business models and they each have their unique advantages and challenges. They are also very different businesses to work for.
Considering the balance of advice-led versus product-led in your business will help an advisor understand the repercussions of major restructures such as appointing senior staff, selling your business to a potential suitor, or merging your business with another firm.
We are sure most advisors will agree that understanding the impact of these changes on client and staff perceptions is much more important than a superfluous debate about the use of the word “independent”.
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