Perhaps the most dramatic change is the ban of commissions for advised retail investment products. (The new rules do not affect commissions on insurance products or group pensions.) Starting next year, British advisors must also disclose and charge clients separately for advice.
Advisors must also identify their services as being in one of three categories: independent, restricted or simplified. Independent advisors must have access to any and all financial products or solutions that would be suitable for their client base. Restricted services offer access only to a limited range of products; these advisors will need to describe the scope of their advice and explain their services, pricing and value clearly. Simplified services will include low-complexity products and very limited advice for people with simple needs.
An interesting aspect of the fee process is that firms that provide advice alone will need to charge value-added tax (currently 20%) to clients, while those who implement, review and monitor a client's assets will not have to charge this tax. Say an advisor follows these stages of planning:
* Gathers data.
* Analyzes and finds suitable investment options.
* Provides client with reports, financial health checkups and forecasts.
* Recommends specific investment products.
* Acts between the client and intermediary to arrange the purchase of the products.
* Provides ongoing review service to ensure that the products still meet the clients' needs.
Advisors who provide all these services will be exempt from charging a value-added tax. Advisors who only provide the first four must charge clients the tax.
Further, U.K. advisors must now have a higher-education diploma and complete 35 hours of continuing education annually. They must also obtain an annual statement of professional standing from an accredited body, certifying that they meet the new requirements. This certification would also disclose any regulated activities - such as dealing in securities or derivatives - and list an advisor's educational qualifications. (Advisors who do not have a diploma may take courses over time to catch up.)
In order to be eligible for an organization's certification, a practitioner must be a member of the organization and adhere to its code of ethics.
The new rules also include a phased-in capital requirement equal to 25% of a firm's annual operating expenses; full implementation is due by December 2015.
These requirements are going to change the financial services industry in the U.K. substantially. In fact, Britain's Financial Services Authority has predicted that up to 25% of financial advisors will leave the profession by the end of the year. A representative of the authority told me that the average advisor in the U.K. is in his 50s and has been working in the industry for nearly 30 years (sound familiar?); many advisors will choose not to reinvent their practices to focus on advice rather than products.
It's important to note that the U.K. is not the only country developing such regulations for financial services practitioners. Australia, for example, rolled out a ban this year on "conflicted remuneration," saying that advisors providing financial product advice to clients can only receive remuneration from their clients. (We'd call that fee only.) The Netherlands, Hong Kong and India are all following suit.
Here's an exercise: Imagine how your current practice would need to change in the face of new regulations similar to the U.K.'s: demanding fee and service transparency, banning commissions on investment products and raising the level of professionalism of investment advisors.
You'd need to consider several aspects of your business.
Charging for advice: If you are not already charging for advice, you would need to. That means separating your advice from execution and being able to demonstrate your value to clients clearly. It also means having a dedicated pricing structure that takes into account the costs to deliver your services, while factoring in your expected profit margin.
You'd then need to strategize on how you get your clients, how they find value in what you do and whether they will happily pay for your services. You would want to segment your current client base, specifically identifying your relationships by complexity of advice and profitability. You would likely need to develop a new service mix, creating levels of services and activities that you will perform for different segments of your clients.