WAKE UP AND PREPARE FOR DEPOLARISATION
The depolarisation regulations are shortly to be released by the UK Financial Services Authority (FSA). Predictions are that the move to depolarisation will have a major impact on the financial services industry . The initiative seeks to improve the means by which investors are sold financial products and advice by their advisers. Much emphasis will be placed on the concept of independence. But how will this affect the wealth management industry?
From an industry perspective, depolarisation will further clarify the roles between the distributor and manufacturer of financial products. The assumed outcome is that private clients can benefit from greater information, enhanced choice and transparency on fees.
This is because product manufacturers and distributors will be required to adapt their product strategies, structures and processes to comply with the stated code of business practice. Moreover, clients will be more certain that the investments offered are most suited to their interests rather than to the distributor’s interests. This is linked to the sales process surrounding the initial offer.
Hitting home
Most affected will be independent financial advisers (IFAs) targeting the retail consumer. However, many private banking businesses will also be impacted. Moreover, clients with net wealth between £50,000 (e72,000) and £500,000 will become increasingly aware of the improve-ments in the retail market space. They will question whether their private banks are either as competitive, differentiated sufficiently or in step with FSA objectives of improving the lot for individual investors.
Many private banks seem to have judged that given their focus is primarily on discretionary solutions, they are unaffected by depolarisation. Nevertheless, the advisory-related business they offer will be impacted. In addition to business model changes, the respective financial institutions must also consider potentially upgrading their private bankers to IFA status. They will also need to be aware of a changing competitor landscape. HNW IFAs will emerge as a dominant player within this market and offer an enhanced range of products and services.
Thus, the practices of private banking whereby clients are offered tailored financial advice around the range of investments under review will inevitably be affected by the regulatory change. It is judged that the impact will not be to the same extent of other sectors servicing private investors. Most cite that as their businesses are modelled on discretionary services, they are largely exempt from the changes. However, many private banking operations in the UK continue to have significant advisory businesses. Meanwhile, the discretionary business of many other wealth managers may not be construed as discretionary in the eyes of the client or, possibly the regulators.
Significantly, the transition from a polarised to a depolarised regime is not often being thought of by private bankers in the context of the attitudes of either the client reactions or the sales process. However, it is precisely these two factors that will be most affected.
Clients, of whatever segment of wealth, are unlikely to spend time discriminating the differences between discretionary and advisory business – both supply an investment solution to their investment needs. In this context, they may just assume that the positive introductions in standardising and clarifying the financial services offering should be available in the discretionary and the advisory space.
Therefore, the private clients that are currently with the private banks on discretionary accounts may demand that the same standards are adopted by private banks in their discretionary offers.
Higher standards
Ultimately, depolarisation will raise the bar in the level of disclosure and engagement for HNW clients. Private banks that choose to ignore the introduction of the regime on the basis that it does not directly cover their business activity overlook the fact that clients are less discriminatory on this detail. Typically, they seek the best solution at the best price with the best relationship. If private banks fail to upgrade their offer, or at least seek to provide a response to depolarisation that outlines the differences of their approach, then clients will be uncertain of the value-added role of the private banking and wealth management sector.
Sebastian Dovey is managing partner at wealth management strategy think-tank Scorpio Partnership
