Magazine Issues » October 2011

RDR: A human capital time bomb

CommutersThe employment problem created by the UK's retail distribution review within the financial advice industry are considerable, says Lyssa Barber of Allemby Hunt, who considers the future of recruitment and retention strategies.

In the week that a UK Treasury select committee recommends a one-year delay for implementing the Retail Distribution Review (RDR), cautioning a potential “stampede” of advisers from the investment industry, it is easy to see that the road to 1 January, 2013 may be anything but smooth. A casual glance at the financial press shows plenty to stir concern: the same select committee recommending an “opt out” option for wealthy clients; 53 independent financial advisers (IFAs) actively downsized staff numbers in the last month; and lingering questions remain over how beneficial the review will genuinely be for client choice.

A significant amount has already been written around RDR, its implementation and the effects it will have on clients and the industry as a whole. One area that seems unexamined is the direct impact it will have on the number of advisers who choose, or are able to remain in the industry.

On the face of it, the numbers being bandied around are relatively reassuring. Forty-nine per cent of advisers are already qualified to the correct level and at least 82% expect to remain as retail investment advisers, according to one estimate. So far, so good. 

However, if we turn those figures around it suggests that we could expect up to an 18% reduction in the overall advisory workforce.  That is huge. Even if we assume that 82% of advisers genuinely do want to remain in the industry, it still does not take into account the fact that a proportion of the 51% who are yet to take the exams may not make the grade or, indeed, want to remain in the industry at all.

Putting aside for a moment the employment law ramifications of dealing with staff who have failed to qualify to the new standards, there remains a not insignificant number of highly experienced IFAs and senior advisers who – given their vintage – were “grandfathered” into their current roles and likely last took a written exam when they were at school. Will these individuals really be motivated and able to put in the 400 hours of study to achieve the minimum level 4 qualification prescribed by the Financial Services Authority? It would be easy to see a gentler path might lie in selling up one’s assets and taking an earlier retirement. Reinforcing this, a number of specialist broker firms have sprung up expressly to assist in the sale of smaller independent firms and their assets.

What can companies do with individuals who do not qualify? Larger IFAs will have the option of moving staff into non-advisory roles, but it is easy to envisage how difficult it would be to retain senior individuals in that scenario.  Smaller firms simply will not be able to accommodate advisers who cease to be able to fulfil their roles. Moving someone senior into a “paid introducer” type of role is a possibility but fraught with concern from a compliance perspective. Could an informal comment be construed as advice? Will senior individuals who do not qualify choose to leave, or will firms be presented with the task of managing them out?

Minding the gap
According to a recent estimate, in 2009 the number of IFAs in the UK was around 21,000. So let us take a dim view of the numbers and ask where the industry is going to make up a potential shortfall of around 3,700 client-facing staff? Without significant, imaginative hiring strategies, it is hard to envisage how this gap will be satisfactorily bridged. Even looking at new research from insurance group Aviva, which predicts only 7% leaving the industry, that is still almost 1,500 advisers.

Larger institutions already have ongoing hiring needs which they struggle to meet because of the paucity of appropriately qualified and experienced client advisors in the UK marketplace. Add a need to cover significant attrition connected to RDR and you are left with a major human capital headache.

The senior manager of an ultra-high-net-worth team recently suggested to me that looking outside the industry at widespread lateral hiring might be one answer. Attracting experienced individuals from related industries into financial services is not a new approach. At least one major IFA has had a programme of this type for some time – but one might take the view that this replaces an intake of new graduates with one of senior level professionals who are making comprehensive career changes.  Is this really going to do the job?

Taking the individual advisers’ view, there clearly may be benefits in the reduction of overall adviser numbers. If qualified at the right level, you will be an increasingly valuable commodity and potentially able to command appropriately increased compensation. That said, businesses are unlikely to want to be put over a barrel by advisers who believe that just holding the qualification is grounds enough for an uptick in salary. Retention for firms will likely be a big issue. Hitting the right balance between compensating fairly and feeling that you are  just paying for loyalty is always hard.

Include the increased difficulty in hiring the right level of qualified adviser and you will have firms ready to pay over the odds to hit their hiring numbers, which can only lead to skewed internal compensation figures – a human resources nightmare. Institutions wishing to retain fully qualified staff will have to think long and hard about what measures can be put in place to ensure loyalty. Above and beyond salary and bonus compensation, they need to ask how attractive they are to work for, and what they can do to be proactive about likely attempts by rival firms to tempt away advisers.

Zero hour
Major organisations with mass-affluent businesses may feel that the fee-paying model is beyond the reach of their clients and may consequently pare down their adviser teams; offering fewer products and ensuring that future hires need not be as technically capable. This clearly runs the risk of staff feeling automatically downgraded if they do not qualify and are moved into a perceived lesser role.

Other firms may go in the opposite direction and revise (or indeed implement) minimum investment size criteria to ensure that their valued advisers are focusing on the larger and potentially more complex/lucrative client. This route makes best use of the advisers’ qualifications while downsizing the overall number of client accounts. Highly experienced advisers with long-term client relationships will be unlikely to embrace being dictated to about letting go of some of their oldest accounts, however.

My sense is that larger companies with more significant hiring budgets will benefit overall from the imbalance likely to be created across the marketplace. With deeper pockets and greater latitude to hire, they will be able to move quickly and forcefully to snap up advisers left dissatisfied by changes and upheavals within their own firms. Boutique firms will need to consider long-term inventive plans – including equity ownership – to bolster their attractiveness, both to new and existing staff.

Eighteen months remain until zero hour. If you have not already asked yourself the questions above, and your recruitment and retention strategy is not yet in place to ensure your advisory capability remains intact when the RDR is put into effect, why not?

Lyssa Barber is managing consultant and head of private wealth management at recruitment consultancy ­Allemby Hunt

©2011 funds europe