LIKE a runner, an IFA must anticipate way ahead in order to go the distance.
Derek Stewart is preparing for a challenging year in more ways than one. His business is readying itself for the biggest shake-up in the independent financial adviser (IFA) sector for a generation, and he is also fighting fit for a series of gruelling long-distance runs.
While his two firms, Strategic Asset Managers and SAM Wealth, prepare for today’s launch of the fee-based era for IFAs, he is training hard for the five-and-a-half marathons he will run in seven days across the Sahara Desert in April.
He is asked how he can train in cold, wet Scotland for the kind of heat he will face in Africa. He smiles, acknowledging the contrast in weather conditions, but he is well used to tackling the toughest of sporting tests at a senior level. Stewart is a former professional tennis coach, a triathlete and also practised martial arts. He believes in pushing himself to the maximum, a philosophy he takes into his business life.
“I like being with creative people who get things done,” he says. He also likes to be ahead and set up Strategic Asset Managers in 2001 with a model designed for the changes that are about to come into effect.
Under the retail distribution review (RDR), advisers will no longer be incentivised by commissions from product sellers but will charge clients a fee. It has been long in coming but it is expected to bring about big changes in the sector as IFAs restructure and some decide not to continue.
“I set up the firm [SAM] 12 years ago thinking this would happen,” says Stewart. “I didn’t expect it to take 12 years, but at least we have had time to be ready.”
The purpose of the change is to bring about greater transparency in charging and improve the level of professionalism.
The Financial Services Authority (FSA), which instigated the review, was unhappy that advisers could effectively conceal commissions paid by providers to IFAs for selling their products. Customers had little idea about how much they were paying and there was a clear contradiction between “independent” financial advice and the practice of selling products on this basis.
However, it is widely assumed that there will be fewer IFAs as a result of the shake-up. While the FSA estimates that fewer than 10 per cent of the 37,000 in the UK will leave the industry, others – such as Ernst & Young and Standard Life – reckon that just 20,000 will remain, the former claiming it will take three years to settle at that figure, and Standard Life believing it will be reached as soon as this time next year.
Stewart recognises some of the weaknesses in the review, particularly the extent to which the public understands what is happening, but generally he is a big fan of RDR.
“The thing I love is that it separates distribution from manufacture where remuneration has been agreed until now. It allowed providers to take 7 or 8 per cent commission. RDR has said that relationship has gone. I am a fan of RDR because it puts the customer in charge and will get rid of some of the dross.”
However, he is concerned that the public may be confused by the new structure which creates two tiers of adviser. “The bad news is that they talk about transparency when there are questions about whether the customer knows what they are dealing with,” he says.
The potential confusion arises in the distinction between those advisers that will be truly “independent” and others who will be termed “restricted”. The former will operate properly on the basis of being free to offer advice across the whole range of products, while the latter will continue to have some sort of tie to providers.
However, there are examples of companies that will provide a sort of hybrid service, promoting in-house products but also selling products on a “best of breed” basis from the wider market. Under the FSA rules, all advisers will need to inform their clients beforehand on what basis they are operating.
Stewart believes the two types of adviser will encourage some independents to go restricted because they will not have the level of research required and there are greater risks attached to independent advice. As a result, there will be more restricted firms.
Another cause of concern is whether advice will become an activity for the better-off. The FSA did not like hidden commissions which gave the impression that advice was free when, in fact, they were part of the management charges. But because they were spread over the life of a policy, the customer often did not know how much was being paid or was happy to pay as there was no up-front bill. With a fee-based system, clients will know exactly how much they will be paying and some may decide not to bother or decide they cannot afford it.
“Yes, there will be an advice gap,” admits Stewart. “This has been called middle class legislation.”
His own firm deals with individuals with a minimum investment of £100,000, though that is not regarded as the top end of a wealth management market that has swollen in recent years with a number of players moving in to Scotland.
Getting advice to the man in the street will be a big test of the new rules.
Stewart hired Kenny McKenzie from Intelligent Capital to help him launch SAM Wealth in August. He says they share a vision of where the industry is going. He recently plundered the same firm to hire David Oliver as a partner. Oliver is a chartered financial planner.
“It is the gold standard, as rare as hen’s teeth,” says Stewart. “I want people with that standard.” There are now six staff at SAM Wealth which is an appointed representative of Strategic Asset Managers, the FSA regulated firm. Altogether, they have almost £100 million of funds invested and he admits that some IFAs have described themselves as fund managers.
“For years, IFAs have pretended to be fund managers. I am an adviser. I am a planner. The line between IFAs and fund managers has been blurred because they make investment decisions on behalf of the client. But what qualification does an IFA have to be a fund manager or the other way around?”
His firm does not rely on external fund managers or insurance companies for advice because it wants to be truly independent, he says.
Justin Urquhart Stewart, the London-based investment guru, is a big fan of Stewart’s firms and culture. “He likes our due diligence and corporate governance,” Derek Stewart says.
He has been able to build a significant foothold in the London market, largely by playing the canny Scots money manager card which still applies in spite of what happened to the Scottish banks in the financial crisis.
He says consolidation in the sector is likely to result from RDR and that he would look at it. “But you can end up cleaning up other people’s mess,” he says.
When he entered the business in 1978, the term IFA did not exist and advisers acted as tied agents.
He worked for Legal & General and then Noble Lowndes, which became the biggest IFA in Britain.
However, the firm went through a series of restructurings and after the fifth in five years which he felt left the client worse off each time, he decided to leave and set up his own business.
He believes the changes now being brought in will benefit the client.
“It will bring about more professionalism and the IFA will need to have a proposition that the client is prepared to pay for,” he says.