Self-directed and execution-only IFA models are unsustainable as clients will soon realise they can do their own dealings without the "help" of an adviser.
This is according to Harry Katz, principal IFA at Norwest Consultants, and follows an FE Trustnet interview in which Schroders’ Robin Stoakley
said he expected more and more IFAs to drop their advisory tag and move solely to an execution-only service once the Retail Distribution Review (RDR) comes into effect.
Katz believes those making the move may struggle in the longer-term.
"I have wrestled with this concept for some time and I just can’t see how outsourcing or self-directed models like this can be sustainable," he said.
"Let’s take self-directed – 'OK Mr Client I can’t be bothered with you, so please do it yourself and I will be charging you for the pleasure.' How long before the client gets wise and realises he is paying for nothing?"
"Alternatively how long before the client is entirely sucked into the maw of the platform and the adviser is left with no business?"
"If you have your own platform, such as Hargreaves Lansdown, then that is entirely another matter, but for the traditional IFA this is going to be a problem."
As a result of the new regulations that will be introduced along with RDR, some IFAs will deny advice to "low net-worth" individuals and move them into a self-directed model.
"The problem is, if you’re charging 0.5 per cent for advice on an individual who holds a limited amount of money – let’s say £20,000 to £50,000 – it’s not worth the IFA's while due to all the regulatory costs," explained Darius McDermott, managing director of Chelsea Financial Services.
However, Katz thinks palming off clients into execution-only is a disservice.
"I have heard a lot about segmenting your client base and allowing the less wealthy clients to go self-directed. This too is, from my perspective, logical nonsense."
"It is the less well-off who are in general less engaged, less knowledgeable and most in need of advice," he said.
Katz also believes outsourcing will eventually come back to haunt IFAs.
"It’s the same story with discretionary managers," he continued. "This time around it’s: 'Yes Mr Client I am going to shuffle you off to a very good DFM. He’ll do the work. He’ll charge you for it – and so will I.'"
"Client: 'So what are you doing for the money?'"
"IFA: 'Well I’ll hold your hand and have interminable meetings with you now and again.' It’s nonsense."
"If you can get away with that and the customer is happy and willing to pay – then good luck to you. But putting myself in the customer's shoes – I wouldn’t stand for that for a nanosecond."
In an interview with FE Trustnet
last week, Stoakley said he expects up to 60 per cent of his business to come from discretionary managers in four to five years.
Paul Davis of Clear Financial Advice is of a similar opinion to Katz.
With regard to an execution-only service, he said: "I’ve never done it and barely ever met a client who said they would be willing to do it."
"It’s very rare to find a client who meets the rules of outsourcing. I think there are some IFAs who have somehow managed to push through this service, when perhaps they shouldn’t have been allowed to."
Clear Financial Advice offers both a fee- and commission-based service. In order to counter the impact of regulatory costs on low net-worth individuals, Davis says the firm will charge a minimum entry fee.
"It’s then up to the client whether they want the service or not," he added.
Davis was less scathing of outsourcing to discretionary fund managers, but says he would much rather use a mixed-asset fund.
"As far as outsourcing is concerned, it all comes down to what proposition the client is looking for," he commented. "If an IFA can see value in using one instead of a fund, then I see no problem in it."
"The biggest issue is the VAT you have to pay on them and the fact that you can get a multi-asset manager to do a far better job at the same price."
In general, Davis says he is a proponent of RDR, but thinks certain regulations need a lot of work.
"The idea of RDR itself is a good one, but I feel the FSA has muddled its way through a number of reforms without realising the negative impact they could have," he explained.
"Take the issue of fund rebates, which will end up costing the client money rather than helping them," he finished.