COST OF PROVIDING FINANCIAL ADVICE

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1 ABI RESEARCH PAPER NO 22, 2010 COST OF PROVIDING FINANCIAL ADVICE Identifying and quantifying the cost of the key components of a full advice service Report from Charles River Associates By Kyla Malcolm, Tim Wilsdon and Charles Xie

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3 COST OF PROVIDING FINANCIAL ADVICE EXECUTIVE SUMMARY Charles River Associates (CRA) was commissioned by the ABI to conduct research into the cost of providing financial advice. The aim of the research is to identify the key components of a full advice service and to quantify the time and costs associated with each individual component. This also enables us to set out the minimum value of premiums that can be profitably served and the associated market size of potentially profitable customers. Components of the financial advice process Figure 1 below provides an overview of the activities involved in each stage of the advice process. Figure 1 Overview of the advice process Lead generation Pre - initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Prospecting Arranging initial meeting Preparation for initial meeting Travel Disclosure Fact find Gathering documents Confirmation of services Review of products and providers Development of suitability report Travel Reaffirm client status Present recommendations Product related disclosure Product sale administration Documentation checking and processing Post - sale administration Advice related administration Source: CRA. Time taken to provide financial advice On average across all channels, the advice process for a new savings and investment customer takes around 7 hours and 40 minutes although there is considerable variation between different channels. Banks complete the process in 4 hours and 20 minutes on average whereas small and network IFAs take 8-9 hours and national IFAs take around 14 hours. (Comparisons based on time need to be treated with care as out-sourcing and overheads are not included and may vary between channels. These will only be captured in comparisons of costs rather than comparisons of time.) It is important to note that the research focuses on typical clients for each adviser type rather requiring all firms to consider a standardised customer. The former approach is advantageous as it captures data on real customers and hence is more likely to be robust. One of the implications of this is that differences between channels will partly reflect differences in the types of customers using these channels. 3

4 Time to provide financial advice (minutes) ABI RESEARCH PAPER NO 22, 2010 Figure 2 Time to provide financial advice for savings and investments by adviser type Small standalone IFA Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Travel Source: CRA calculations. The estimate of time above includes the time taken by all staff in the advice process including advisers, paraplanners/branch staff and administrative staff. One of the findings of the research is that there are substantial differences between channels in the use of non-adviser time. These non-adviser staff are particularly used by IFAs for the preparation of recommendations and the post-decision administration (neither of these are client-facing activities). Over half of the time spent in national IFAs is by non-adviser staff. National IFAs are found to have significantly greater emphasis on post-decision administration and compliance than other firms. They conduct a lot of file checking and require advisers to complete a check list of tasks before the process can be considered complete. For network IFAs, the network itself conducts checks on documents reducing the amount of time that the adviser spends on this activity (with the impact of this captured when the process is examined in monetary terms). Smaller IFAs spend less time on these activities than nationals. For banks and direct sales forces, there is limited use of non-adviser staff because of the extent to which technology is used instead. These systems enable bank based advisers to automate the product selection based on information from the fact find, substantially reducing the amount of time necessary for this step. Direct sales forces similarly save time through investments in technology and because the nature of tied advice means they do not need to search across providers. In some cases this may also reduce the search across products since they will only be able to recommend the products that are in their range. It is important to be careful in the interpretation of the results and it should not be assumed that differences between channels reflect differences in efficiency because: 4

5 COST OF PROVIDING FINANCIAL ADVICE Advisers could be providing different services indeed IFAs are offering an additional service in comparison to tied channels through searching the market; Advisers could be offering different quality for example, there is evidence from interviews that national IFAs are placing considerably more emphasis on administration and compliance than other IFA firms; and Advisers could be serving different customers interviewees indicated that clients using IFAs had more complex needs than those using banks. Time by customer The time taken for both small IFAs and national IFAs to serve existing customers is 2 hours less than for new customers. 1 Network IFAs and direct sales forces both save over 1 hour, but banks save only 30 minutes when dealing with existing customers. The relatively limited savings by banks reflects their extensive use of technology and a highly system driven advice process such that when serving an existing customer the adviser will go through broadly the same process as for a new customer. For IFAs, considerable time savings are made for existing customers. This reflects: A faster fact find which focuses on changes rather than starting from scratch; A reduction in the number of meetings with clients; Faster preparation of recommendations as existing clients are less complicated because IFAs have already got their affairs into some form of order; and Faster administration as client information is already captured on systems. Time by product In all channels the time taken to conduct advice is shortest for protection products and longest for pensions. 1 It should be noted that new customers represent customers that are new to the particular advice business. They are not necessarily customers who are new to advice or those who are new to taking out any of the products considered in this report. Similarly, existing customers are customers who have already received advice from the particular advice business. 5

6 Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Time to provide financial advice (minutes) Pension Protection ABI RESEARCH PAPER NO 22, 2010 Figure 3 Time to provide financial advice across channels by product type Small standalone IFA Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Source: CRA calculations. Pensions took slightly longer to advise on than savings and investments, ranging from 10 minutes longer for small IFAs to 60 minutes for network IFAs. The increase in time arose due to the activities involved in the preparation of recommendations. When examining the weighted average time to provide advice across channels, pensions take around 2 hours longer than savings and investments. This mainly reflects the fact that pensions are primarily distributed by IFAs. Hence the weighted average picks up not only the increase in time in each individual channel but also the increase in the proportion of pension sales conducted by IFAs (where the advice process takes longer). Providing advice on protection products is considered less complex compared with other products as it is considered relatively easy to identify the client s needs and explain this to them, and information on the price of protection products is readily available online. On average the time taken to advise on protection products was around 50 minutes less than that for saving and investments. Costs by product As well as examining the time taken for the advice process, we convert this into monetary terms taking into account the cost of time for different types of staff, the cost of overheads and an estimate of average profitability. It is also important to take into account the fact that advisers spend some time advising customers who do not purchase a product. If these customers do not pay for the services then these costs would need to be covered through the sales which are successful. 6

7 COST OF PROVIDING FINANCIAL ADVICE Table 1 Cost of advice ( ) Product Successful sales only Cost taking into account unsuccessful sales Saving and investments Pensions Protection Average Source: CRA calculations. The average cost of advice for successful sales is estimated as 510. account the unsuccessful sales increases this figure to 670. Taking into Minimum case size Based on the cost of providing financial advice and average commission rates calculated by the FSA, we estimate the minimum case size that would be necessary for the commission generated to meet the costs of providing advice. Across all product types, customers making regular contributions would need an average annual contribution of 2,310 ( 193 monthly), while customers making a lump sum investment would need to be able to invest 10,300. Accounting for unsuccessful sales increases the minimum case size to 3,080 ( 257 monthly) for regular contributions and 13,730 for lump sum investments. Some advisers would be willing to take on new customers with small value investments even if customers would not be immediately profitable. This is partly explained by their expectation that these customers would become profitable in the future. Potential market size by product Having identified the size of premiums for which advice can be profitably provided, we also assessed the potential market size associated with these levels of contributions i.e. to consider the number of customers that might be able to make investments of the necessary level (not the customer who would be willing to make these investments). 7

8 ABI RESEARCH PAPER NO 22, 2010 Table 2 Population size (millions) Successful sales only Taking into account unsuccessful sales Regular contributions Collective investments Pensions Protection Lump sum investments Collective investments Investment bond Pensions Source: CRA calculations. Overall we find that when taking into account the costs of unsuccessful sales, around 9-12 million customers could be profitably served for most products although this figure falls to around 1 million for regular contribution pensions. 8

9 COST OF PROVIDING FINANCIAL ADVICE CONTENTS 1.0 INTRODUCTION Background on the market Methodology Structure of the rest of the report Components of the financial advice process Prospecting / lead generation Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Time taken to provide financial advice Time by activity and adviser type Time by customer Cost in terms of time by products Regulatory requirements and good practice Cost of advice Monetary cost of advice Minimum case size by product Potential market size by product 51 LIST OF FIGURES Figure 1 Overview of the advice process 3 Figure 2 Time to provide financial advice for savings and investments by adviser type 4 Figure 3 Time to provide financial advice across channels by product type 6 Figure 4 Overview of the advice process 17 Figure 5 Figure 6 Time to provide financial advice for savings and investments by adviser type 25 Time to provide financial advice for savings and investments by adviser type and staff 26 Figure 7 Average time for initial meeting across all channels (minutes) 28 Figure 8 Time on preparation of recommendations 29 Figure 9 Time to present recommendations 32 Figure 10 Time for post decision administration 33 Figure 11 Travel time 34 Figure 12 Client-facing and non client-facing time by channel 35 Figure 13 Time to provide financial advice across channels for new and existing customers 36 Figure 14 Time to provide financial advice across channels by product type 39 Figure 15 Monetary cost of advice by product and channel new customer 44 Figure 16 Monetary cost of advice new and existing customers 46 9

10 ABI RESEARCH PAPER NO 22,

11 COST OF PROVIDING FINANCIAL ADVICE 1.0 INTRODUCTION Charles River Associates (CRA) was commissioned by the ABI to conduct research into the cost of providing financial advice. The aim of the research is to identify the key components of a full advice service and to quantify the time and costs associated with each individual component. The research seeks to identity: how the cost of full advice varies by the types of adviser, customer and product; the size of the market for which it is economic to provide full financial advice (as measured by a minimum case size that can be profitably served) under the current regulatory regime; and market segments of potentially profitable customers. The ABI was keen to understand the activities involved in the existing advice process and gain a detailed assessment of the current time taken for these activities. Providing a detailed breakdown also enables the ABI to assess the time taken for those activities that may be particularly affected by regulatory changes such as those introduced by the Retail Distribution Review (RDR). 1.1 Background on the market The ABI requested that this research cover three different types of products: Savings and investments such as investment bonds; Pensions such as personal pensions and individual stakeholder pensions; and Protection such as term assurance, income protection and critical illness. It is worth noting that there are differences between the distribution channels that are commonly used for each product as shown in Table 3 below. 11

12 ABI RESEARCH PAPER NO 22, 2010 Table 3 Distribution channels by product and premium type Small IFA Network National Banks Direct Total IFA IFA Sales intermediated premium ( million) Regular premium Investment and savings 5% 4% 7% 57% 26% 650 Pension 26% 21% 32% 7% 14% 2,727 Protection 17% 14% 21% 39% 9% 802 Single premium Investment and savings 16% 13% 20% 40% 11% 24,819 Pension 27% 22% 34% 5% 13% 14,187 Protection 21% 18% 27% 34% 0% 185 Source: ABI Statistics 2009, Matrix IFA data and CRA calculations. Note: The IFA figure from the ABI has been split between different types of IFAs in proportion to turnover figures for these types of IFA from Matrix IFA data. The figure for direct sales has been calculated by deducting the figure for banks from the single tied figure. It is clear from Table 3 that the distribution of products varies between both products and premium type. The table shows that pensions are mainly distributed via IFAs with a much smaller proportion of pensions sold through banks and direct sales forces. This result is also consistent with the evidence found during the discussions with advisers in the banking channels and direct sales forces who indicated that selling pensions would be far less common than selling investments or protection products. It is important to bear this in mind when considering the results for the tied channels for pension products. We use the figures from Table 3 to calculate the averages across different distribution channels for various figures presented in the report. 1.2 Methodology The project had three main stages which are explained below Setting out activities in the advice process The first stage of the research work involved setting out the main activities that are undertaken during the course of the advice process. Initial interviews with a small number of advisers were then used to refine the set of activities and to ensure that we had a clear understanding of the components of each activity in more detail. The full set of activities is set out in Chapter 2. Discussions with advisers indicated that the most appropriate method of collecting information regarding the cost of the advice process would be to focus on the amount of 12

13 COST OF PROVIDING FINANCIAL ADVICE time taken for different stages and then to convert this to a monetary cost through additional information such as the cost of advisers time and overheads. It was also identified during this stage of the work that firms use different business models and it would be important to understand the degree to which activities conducted by advisers in some firms are conducted by paraplanners and administrative staff in other firms. The output of this stage was to have a structured method of information collection that focused on the time taken to conduct activities and which could be used for advisers working in a variety of different types of channels and using different business models Variation by advisers, products and customers Although the process of providing financial advice is broadly the same, the actual activities and level of the associated cost can be very different across: The types of intermediary; The types of customer; and The types of products. Variation in costs by intermediary The costs of full advice could differ substantially for different types of intermediaries for a number of reasons (independent of their focus on particular product types or customer types), including: Economies of scale could allow larger firms to spread cost across more customers; Technology can be used to substitute for time spent by advisers; Non-adviser staff (who are cheaper) could be used to conduct some activities instead of advisers; Firms may undertake different activities in-house compared to outsourcing e.g. compliance may be provided by third parties; and Firms offer different services such as offering restricted advice or searching across the whole market. The costs are therefore expected to vary depending on the type of firm involved. Information was gathered for the following types of firms: Small IFAs these are standalone IFA firms with less than 10 advisers; IFAs using network services networks provide certain activities such as research services or compliance and regulatory services on behalf of advisers; National IFAs these are large IFA firms who have a wide coverage across the country; Direct sales forces these are sales forces that are tied to a particular product provider; and 13

14 ABI RESEARCH PAPER NO 22, 2010 Banks we focus on the tied sales force within banks rather than any in-house IFAs that might also be available through the banking channel. 2 Variation in costs by customer Costs would also be expected to vary depending on whether the customer concerned is a new customer for the business or an existing (repeat) customer with an established relationship with the financial adviser. 3 For example, it may not be necessary to undertake a full fact find for existing customers but rather to focus on any changes since the customer s previous review. Similarly, customers who have built up a relationship of trust with their adviser may be more willing to receive the recommendation by post or rather than seeking a second meeting. There could also be a different split of new and existing customers between different channels that impacts costs. For example, IFAs may be more likely to have ongoing relationships with clients over many years whereas other channels may be more likely to have new customers. One of the methodological decisions that was taken during the course of discussions with the ABI was to focus the research on typical clients for each adviser rather than to request that all firms consider a standardised customer. The former approach is advantageous as it captures data on real customers and hence is more likely to be robust. However, it is important to recognise that resulting differences by channel will therefore reflect differences in the types of customers which are typical in these channels. For example, it was generally agreed that customers using IFAs tended to be more complex in their existing products and needs than customers using banks or direct sales forces. Hence we would expect to observe differences between channels which reflect these different customers. Variation in costs by product As noted, the ABI requested that the research identify the cost of the advice process for different products: savings and investments; protection products; and pensions. Given that there are substantial differences between individual business and group business, after discussion with the ABI, the research was focused on individual business and does not seek to address costs associated with group products. The cost of some categories would be expected to vary between different products (such as the complexity of identifying the appropriate provider) while in other categories, costs would be expected to be invariant to the product under consideration (such as the cost of initial disclosure). 2 3 In some cases the advice service might be offered by a provider different to the owner of the branch network. It should be noted that new customers represent customers that are new to the particular advice business. They are not necessarily customers who are new to advice or those who are new to taking out any of the products considered in this report. Similarly, existing customers are customers who have already received advice from the particular advice business. 14

15 COST OF PROVIDING FINANCIAL ADVICE It is important to recognise that in many cases individuals will not be approaching their adviser with a desire for a specific product but rather will frequently seek holistic financial advice at key life stages or advice resulting from some change in personal circumstances e.g. an inheritance or redundancy payment. One of the implications of this is that obtaining costs associated to one particular product may lead to an overstatement of costs because in practice some costs will be shared across multiple products Interviews and gathering of cost information The third stage of the assignment was to conduct interviews with a variety of advisers from different channels to collect cost information. Since one of the aims of the research was to ensure that there was a good qualitative understanding of the different elements of the advice process, it was agreed with the ABI that the most appropriate manner of conducting this stage was through a series of in-depth structured discussions with advisers. Hence it should be noted that the results do not purport to represent a large sample of the advisory community but rather seek to provide a qualitative understanding of the advice process and how this varies between channels, customers and products. Table 4 sets out the total number of interviews that were conducted between November 2009 and February 2010 and on which the results are based. Table 4 Number of interviews Category Number of interviews/completed surveys Small standalone IFA 6 Network IFA 6 National IFA 4 Banks 6 Direct Sales Force 3 Other 5 Total 30 Source: CRA. The category other refers to interviews which were conducted with a variety of individuals representing: network or national head offices; product providers; and service providers. Evidence from these discussions has been used in quantifying certain elements of the advice process (such as the cost of network services or the cost of outsourcing certain activities) and in understanding some of the qualitative differences between channels. 1.3 Structure of the rest of the report The rest of the report is structured as follows: Chapter 2 sets out detailed information on the different activities which are contained within the full advice process; 15

16 ABI RESEARCH PAPER NO 22, 2010 Chapter 3 provides the results of our analysis in terms of the amount of time that it takes for the advice process to be completed. This information is provided for different channels, new and existing customers and products; and Chapter 4 translates these results into a cost of advice in monetary terms and then examines the minimum case size that could be served in order to cover these costs. 16

17 COST OF PROVIDING FINANCIAL ADVICE 2.0 COMPONENTS OF THE FINANCIAL ADVICE PROCESS Before considering the cost of financial advice it is important to set out what is involved in providing such advice. The first step in the project was to establish the different activities in the advice process. It is useful to break out the activities in this manner for a number of reasons including that doing so: aids understanding of where differences in cost reflect different activities being undertaken; allows for consideration of how different activities might be affected by changes in regulation; and facilitates questioning, allowing us to test the credibility of the responses. Figure 4 provides an overview of the activities involved in each stage of the advice process. Figure 4 Overview of the advice process Lead generation Pre - initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Prospecting Arranging initial meeting Preparation for initial meeting Travel Disclosure Fact find Gathering documents Confirmation of services Review of products and providers Development of suitability report Travel Reaffirm client status Present recommendations Product related disclosure Product sale administration Documentation checking and processing Post - sale administration Advice related administration Source: CRA. In the rest of this chapter we provide further detail on what is involved in these different stages of the process. We also describe where financial advisers undertake the majority of the activities, and where other staff may be involved (this is discussed in detail in Chapter 3). 2.1 Prospecting / lead generation Before the individual advice process can begin, advisers conduct prospecting or lead generation activities to identify and contact potential customers. The most timeconsuming activity in this stage for most advisers is face-to-face meetings with potential clients. Often advisers have to conduct multiple initial meetings with potential clients in order to obtain one client who goes through the whole process to completion. Other activities at this stage are often focused on direct marketing to potential clients. In larger firms, marketing of this kind may be carried out by administrative staff or specialised marketing teams rather than the adviser. Technological advances such as the increased use of electronic communications have changed the nature of marketing. 17

18 ABI RESEARCH PAPER NO 22, 2010 Many smaller firms report that they conduct little prospecting activity, relying instead on referral arrangements (especially from other professional services providers such as accountants and lawyers), recommendations by existing clients and ongoing advice for existing clients. Since this activity is not part of an individual advice process, the costs of undertaking lead generation is not captured in Chapter 3, which considers the time taken for a single advice process. Instead this is captured in Chapter 4, which takes into account the other costs involved in undertaking the advice process. 2.2 Pre-initial meeting This stage mainly involves two activities: Arranging the initial meeting; and Preparation for the initial meeting. Arranging the meeting may be done by administrative staff and often this will also serve as an opportunity to identify why the client is seeking financial advice at that particular time. Financial advisers (who always conduct the initial meeting) may need to prepare materials for the meeting. For new customers this may involve preparing some general marketing presentation materials advisers often have a new customer pack that they give to clients. For existing customers, advisers will typically review the current value of existing products. The time needed for this has reduced over time due to the increased use of technology and platforms making information more easily available online. 2.3 Initial meeting The next step is for advisers to meet with the client and this involves a number of different elements which we set out below. Travel The initial meeting is mostly conducted face-to-face (although there are some exceptions to this for some firms or for some existing customers). The extent to which advisers, rather than clients, do the travelling varies between firms with for example, branch-based advisers commonly expecting clients to travel to them. 4 Disclosure Whether the first meeting is in person, by telephone or in writing, the adviser must start the meeting by providing information to clients with regard to their service offering and 4 It is important to note that our estimates of the cost of advice focus solely on costs to the industry, However, customers will also face costs (in addition to paying for the advice) such as from the time they spend with an adviser or travelling to meetings. 18

19 COST OF PROVIDING FINANCIAL ADVICE charges. They must inform the prospective client of their status whether they advise on products from the whole of the market (independent), from a limited range of product providers or from a single company (tied). 5 They also need to inform the client of the basis on which the firm will charge for their advice whether it is fee-based, commissionbased or a combination of both. The RDR will require that advisers move to using adviser charging in future. 6 Disclosing information on status and on charges are usually intertwined in the same discussion so that advisers can explain their charges in the context of the services that they will be providing. For this reason we do not provide separate information on these two elements. Fact find The fact find dominates the initial meeting. This is used as the method of collecting information about the client so that the adviser can understand the client s financial situation and objectives, ensuring that the adviser can then analyse the financial needs of the client and make recommendations accordingly. The fact find forms the foundation of the subsequent steps so advisers spend a significant amount of time on this to make sure that they have accurate and relevant information. Advisers collect information in three areas: personal details; financial details; and planning and objectives. The first two areas are often colloquially referred to as hard facts as they cover factual information on the client and the last as soft facts as it is mostly about what the client is seeking to achieve. Gathering personal details involves obtaining the client s basic information such as family details and employment status. In respect of financial details, the adviser needs to understand existing financial assets and liabilities. Many advisers will ask clients to provide a monthly income and expenditure estimate enabling the adviser to assess cash flow and the disposable income that might be available for investment. Assuming that investment products may be appropriate, advisers need to understand the client s attitude to risk which is typically done through a series of carefully designed questions to reveal this information and then confirming the implications with the client to ensure that is what they would have expected. In the last section on financial planning and objectives, the adviser needs to understand what the client is seeking to achieve such as saving for a house purchase, funding their children s education through school or university, or for retirement. 5 6 Advisers need to provide the option of paying for the advice via fees if they are to qualify as an independent financial adviser. See FSA, Distribution of retail investments: Delivering the RDR feedback to CP09/18 and final rules, Policy Statement 10/6, March

20 ABI RESEARCH PAPER NO 22, 2010 Although the actual fact find process may be similar in different firms, differences arise in respect of how the information is gathered. Some firms tend to use IT driven processes with fact finds being completed electronically during the initial meeting. Others report that they prefer to use a hard copy fact find arguing that an electronic fact find creates a barrier with clients who cannot observe what information is being written down and may be reluctant to have financial information captured electronically (even though most advisers do this eventually). Part of the role of the initial meeting will also be to build a relationship of trust with the client, rather than limiting it to the functional aspects of collecting information. 7 Advisers report that this takes time hence, while advances in technology could help advisers save time on this part of the meeting, they may still want to spend a similar amount of time with the client in order to build this trust. 2.4 Preparation of recommendations It is in the preparation of recommendations stage that a number of firms will use staff such as paraplanners or administrative staff to conduct some of the activities. Gathering documentation After the fact find, advisers may need to collect documents on the client s existing products. The process followed (and whether documents are gathered at all) will depend upon the nature of the client s needs and complexity. For clients expected to seek longterm ongoing advice, or those where the advice is inherently linked to existing arrangements such as pension transfers, documents would need to be gathered. In some cases the client would bring the necessary documents to the initial meeting while other clients would be asked to sign a letter of authorisation enabling the adviser to obtain documents directly from product providers. (Many advisers believe this is more efficient and ensures the information is up to date.) By contrast, clients who are considered transactional would be unlikely to be asked to provide evidence of existing arrangements or to sign an authorisation letter. As well as gathering documents from the client, advisers will also need to gather documents from product providers so that these can be given to the client. The availability of information online has reduced the time taken in this step compared to in the past. Confirmation of services to be provided / engagement letter After the initial meeting, some advisers require a signed engagement letter from clients to confirm that they would like to proceed with the process. This is most commonly required by fee based advisers who want client agreement in order to ensure that they will be paid 7 In some cases, the fact find would also reveal that the adviser may need to recommend the client to an alternative adviser. This would be relatively common in respect of pension transfers relating to complex pension arrangements or in banking channels where more wealthy clients may be directed to in-house IFAs rather than tied advisers. We do not consider these examples further. 20

21 COST OF PROVIDING FINANCIAL ADVICE for any time spent on the client s behalf. Other advisers may not send out an engagement letter or may simply set out what has been discussed and how they will proceed without requiring a client signature. Review of products and providers suitable to meet consumer needs The next significant step after the first meeting is for the adviser to analyse the client s financial needs using the information collected from the fact find. The adviser will then be able to consider the products which are suitable to meet those needs. Different advisory businesses will use different approaches in this step of the process. In some IFA businesses, paraplanners will be used to conduct the initial review of the appropriate products with the advisers checking the recommendations and altering them as necessary. For other businesses, technology is used to narrow down the products appropriate to client needs. The extent of search which occurs during this stage depends on the type of adviser. Independent advisers need to search across providers from the whole of the market (although in practice many firms will select providers from an existing panel which is itself reviewed on a regular basis). Alternatively, tied advisers only need to consider the type of product that is suitable for clients but do not search between different providers. Development of suitability report The recommendations for the client will ultimately be delivered through a written suitability report which includes a brief summary of the client s financial situation, the analysis by the adviser of the client s financial needs, the products and providers recommended and the reasons for the recommendations. Depending on the business model, financial advisers can sometimes delegate activities to support staff and paraplanners in constructing this report. It is also worth noting that although we have included the suitability report under this stage of the process, a number of interviewees stated that they would not construct the report at this stage. Instead, they would compile the formal suitability report after they had presented the recommendations to the client and once it is already clear how the client intended reacting to the recommendations. 2.5 Presentation of recommendations After compiling the recommendations, most typically the adviser will meet the client again and present the recommendations to them. Some advisers will send the report to the client before the meeting, especially when the client is an existing customer. The presentation consists of three parts (described below), although in practice the second two parts are highly interrelated and cannot be distinguished clearly. 21

22 ABI RESEARCH PAPER NO 22, 2010 Reaffirm client s financial status and objectives The adviser usually starts the presentation by checking whether the client s financial status and objectives remain unchanged since the first meeting. This is to ensure that there have not been any sudden changes to personal circumstances which may alter the validity of the recommendations. Present recommendations Advisers generally spend significant time talking the customers through the recommendations usually by explaining the suitability report (assuming that this has been prepared). This ensures that the client acknowledges his financial situation, fully understands the analysis of financial needs and any gaps that have been identified, why particular products and providers are selected and the associated costs. Product-related disclosure Product specific disclosure typically involves explaining the key facts document to clients. Many advisers combine this section with the previous section in presenting the suitability report and overall recommendations. Since these two steps are typically integrated we do not separate them out in the analysis of time and costs. 2.6 Post decision administration After the presentation in the second meeting, if the client is satisfied with the recommendations and would like the adviser to proceed with product purchases, the advice process then enters the post decision stage which includes: Product sale administration; Documentation checking and processing; Post-sale administration; and Advice-related administration such as invoicing. Product sale administration work is often carried out by administrative staff rather than advisers. Depending on the firm and the product, some firms will complete the great majority of application forms leaving the client to provide a signature; other firms will ask the client to complete at least some sections of the forms to ensure the client understands what is going on. As well as administration which is conducted to enable clients to take out the relevant products, administrative checking also arises on the advice itself. The checking includes two aspects: whether the recommendations are suitable for the client and whether there are any mistakes in the documentation. Some firms check all the documents that go to the client before they are sent out. Other firms selectively check cases with more emphasis put on inexperienced advisers or complex products (pension transfers and structured products were frequently mentioned during interviews). The actual checking process varies considerably between different business models. 22

23 COST OF PROVIDING FINANCIAL ADVICE Firms offering ongoing services tend to spend more time on post-sale administration than those who are not. They may call the client to check if he is satisfied with the service. Firms who are paid on a fee basis would also have to undertake administration related to payments of their fees, while those paid through commission may need to spend time reconciling payments from providers. 23

24 ABI RESEARCH PAPER NO 22, TIME TAKEN TO PROVIDE FINANCIAL ADVICE In this chapter we set out the data we have collected on the amount of time spent on advisory activities and discuss the differences by advisers, customers and products. The next chapter considers the advice process in terms of the monetary cost associated to it. It is important to note that: It is not possible to make like-for-like comparisons by focusing on time alone. There are some categories that will only be reflected in the calculations in monetary terms (such as the cost of out-sourcing or overheads); and We need to be cautious about drawing any conclusions about relative efficiency from looking at time alone. It is possible that a process that takes more time to complete is more efficient as the staff employed to do it may be less expensive. Throughout this chapter we present information on the amount of time taken to go through a single end-to-end advice process. It should be noted that this chapter therefore focuses on the time taken for an advice process that leads to a successful sale of the relevant product. As such, the time taken in lead generation and in conducting early parts of the advice process that do not lead to sales is not captured in this chapter. The impact of time spent on unsuccessful sales is considered in Chapter Time by activity and adviser type In this section we set out the amount of time taken for the different activities in the advice process and show how they vary by adviser type. Throughout this section we present the results for a new savings and investments customer, as interviewees typically found it easier to think through the details of this type of customer before considering any differences which arise from either existing customers or different products. We set out the results for different customers in section 3.2 and for different products in section Overall time by adviser type We start by considering the total time for the overall process before providing additional detail on various components, paying particular attention to where there are substantial differences between adviser types. 24

25 Time to provide financial advice (minutes) COST OF PROVIDING FINANCIAL ADVICE Figure 5 Time to provide financial advice for savings and investments by adviser type Small standalone IFA Source: CRA calculations. Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Travel Figure 5 above sets out the total amount of time taken for providing a full end to end advice process by different channels. It includes time by all different types of staff (including financial advisers, paraplanners/branch staff and administrative staff) and has been split across the major components which comprise the advice process including the travel time which is needed to meet clients outside the adviser s office. On average across all channels, the advice process for savings and investments takes 7 hours and 40 minutes. 8 It is clear that there is considerable variation by channel, ranging from 4 hours 20 minutes in the banking channel to around 14 hours for national IFAs. 9 There is only half an hour s difference in the amount of time taken by small IFAs and network IFAs at around 8 hours 50 minutes and 8 hours 20 minutes respectively. The results for small and network IFAs are similar to those found by previous research conducted for the ABI in 2002 which estimated that IFAs took around 8 hours 20 minutes to complete the process. 10 This is also broadly in line with research conducted for the FSA which found that advising on lump sum unit trusts took just under 8 hours. 11 The direct sales channel takes 6 hours 30 minutes overall which is slightly shorter than the 7 hours estimated for the ABI in 2002 the reduction in time is consistent with The average figure is based on a weighted average using the proportion distributed through each channel as set out in Table 3. Throughout section 3.1 the weighting is based on the distribution split for lump sum saving and investment products. The longer length of time taken by national IFAs was consistent among all of the national IFAs interviewed. As noted overleaf this reflects their use of non-adviser staff (which may not have been captured through previous studies). Strategies for tackling the savings gap The role of the saver agent, An Oliver, Wyman & Company report commissioned by the ABI, August Costing Intermediary Services, Financial Assessment of Investment Intermediaries, Report for the FSA by Deloitte and Touche LLP, November

26 Time to provide financial advice (minutes) ABI RESEARCH PAPER NO 22, 2010 interview evidence. For the banking channel the time of 4 hours 20 minutes is around 1 hour 20 minutes faster than that found by the ABI s previous research. This is consistent with evidence from the interviews with firms operating through the banking channel who have stated that the increased use of technology over the last 5-10 years has significantly shortened the time required for the advice process to be completed. It should be noted that the data for the banking channel represents their tied adviser channel (rather than the IFA channel which some banks also have). Hence advisers do not need to consider providers across the whole of the market. The different service that is offered by tied advisers compared with the IFAs is one of the reasons for the substantial variation in the time taken for preparation of recommendations (considered in section 3.1.4). It is also important to recall that the time taken for the full advice process reflects the time necessary to serve their typical customers. Hence if new customers approaching IFAs (especially national IFAs) have more complicated needs than others then we would expect these customers to take longer to serve than other customers. Figure 6 below splits the time (excluding travel time) between that spent by the financial adviser compared to other staff such as paraplanners and administrative staff. Figure 6 Time to provide financial advice for savings and investments by adviser type and staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Small standalone IFA Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Source: CRA calculations. Figure 6 provides additional detail on the overall advice process which helps to interpret the results and the variation between different types of advisers. It is clear from this that there are very substantial differences in the extent to which non-adviser staff are used. The main areas where other staff are used (across all IFAs) are in the preparation of recommendations and the post-decision administration. This makes intuitive sense since 26

27 COST OF PROVIDING FINANCIAL ADVICE neither of these represent client-facing activities. For banks and direct sales forces, there is limited use of other staff because of the extent to which technology is used instead. National IFAs represent the channel in which paraplanners and other staff are most widely used among the five channels. Indeed, of the 740 minutes taken to complete the advice process (excluding travel), less than half of this time is taken by the adviser with other staff taking 470 minutes. It is particularly striking that the great majority of the time spent on the preparation of recommendations by national IFAs is undertaken by other staff (primarily paraplanners) which represents a significant difference compared to other channels. Even though national IFAs take longer than other channels, this does not necessarily mean that they face the greatest cost of providing advice since the cost of time for paraplanners and support staff is significantly lower than that of advisers. Hence these firms may be able to make efficiency savings through the use of different types of staff conducting different activities. The impact of this is taken into account in Chapter 4. That small IFAs and network IFAs use other staff to a lesser degree reflects the fact that small IFAs are less likely to have paraplanners than other channels, and that network IFAs effectively rely on the network to provide some of the services for them. This significantly reduces the amount of work that needs to be undertaken by other staff but again the impact of the costs of this will be picked up in Chapter Pre-initial meeting Before the initial meeting takes place, the adviser takes some time to arrange the meeting and prepare for it. Across the five channels the average time taken in this stage is around 20 minutes Initial meeting One of the surprising results of the research was to find that the time taken for the initial meeting was very similar across all channels, with 80 minutes the average time. This is surprising since the majority of interviewees indicated that IFAs would be expected to have clients who had more complicated financial arrangements than customers using the banks or direct sales forces. In turn this would have suggested that IFAs would require longer to gather information than other advisers. In practice, a number of IFAs will send clients a confidential questionnaire which clients will be asked to complete in advance. The questionnaire would typically cover some of the elements of the fact find and IFAs who use this approach report that their clients provide good responses to the questionnaire. This practice saves some time for IFAs during the course of the initial meeting compared to when IFAs do not follow this approach. Some IFAs who had frequent referrals from accountants also noted that the accountant may provide the IFA with financial details on the client in advance of the meeting. Many IFAs avoid using a laptop in the initial meeting, as they believe this causes a barrier between the adviser and the client by stopping the natural flow of conversation between 27

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