Financial Planning for 'Middle England'

Gill Cardy and I ran a workshop recently at the ICAEW's annual conference for their financial services faculty.  Over time, we have become increasingly exercised by the way in which a growing proportion of IFAs appear to think that the only way in which our professional sector can survive is by restricting our services to a rather narrow monied elite.

Indeed, one of the speakers at this event, whose anonymity I shall preserve, contended that financial-planners ought to be running their businesses on the following model:  140 client meetings a year, each charged at a minimum of £2,500.

To say that this is a 'nice' business model to aspire to would be an understatement.  I am merely left wondering what proportion of 'normal' UK wage-earners would be able to afford such a service.  The 2009 survey carried out by the Office for National Statistics makes revealing reading:

Average salary	£25,428
Top 25% earnings	£31,759
Top 10% earnings	£44,881
Top 5% earnings	£58,917
Top 1% earnings	£118,027

Clearly, there's a great deal more data to help us define our target clients, other than salary/income, but even the above snapshot is sufficient to demonstrate that IFAs are unlikely to be able to charge fees equating to 10% of our client's gross salary.  It does seem as if a great deal of the current input from 'consultants' advising members of our profession how to prepare for the RDR, is likely to leave the vast proportion of normal investors in the far-from-benign clutches of the highstreet banks.  The cynical amongst us might argue that this is one of the objectives of the RDR, but I couldn't possibly comment.

It seems to me that there are opposite extremes that we need to avoid.  None of us are likely to make an adequate living specialising in financial basket cases.  Many of us might struggle to obtain the kinds of clients for whom a £2,500 fee is regarded as mere pocket-change.  In between those extremes, there are a range of shades of relative affluence, each with its own needs and priorities.  Surely to goodness, we can come up with a viable financial planning model for 'middle england'?

Talking about tax

It is a depressing but almost perennially true fact that a relatively minute proportion of accountancy firms in the UK have a genuinely integrated tax-planning and financial-planning service proposition for their clients.  It has been encouraging here, at 2020 Financial Services, to recently have received an increasing number of enquiries from accounting and tax-specialists, who are focusing on the strategic issue of the interface between tax-based and financial-planning services.

And yet, given the huge governmental pressures on revenues, tax-planning should be pretty much top of our priority list when assisting clients.  And when tax-planning, it's almost impossible not to address the financial-planning implications, isn't it?  Apparently, the government has plans in place to collect over a billion pounds in additional revenues, from a whole bundle of initiatives.

If our aim as IFAs is to protect our clients' wealth from erosion, then now's the time to talk about the following subjects:

Capital Gains Tax - with the top income tax rate at 50% and the CGT rate at 18%, how are we going about constructing our clients' investment portfolios?  In the medium term, the discrepancy between the two rates is unlikely to persist - but right now, there's a compelling argument in favour of non-income producing assets for higher-rate taxpayers.

ISAs - with the increased personal limit now at £10,200, why aren't we promoting these products more consistently with clients.  If we have clients within a decade or so of retirement, we should be seeking to max out their takeup of this invaluable allowance.  And remember that, whilst those aged 16-17 can only have cash ISAs, those aged 18 or above can access the full deal if their parents have the wherewithal.

Inheritance Tax - the IHT threshold remains unchanged at £325,000, but the transferability of thresholds means a combined limit of £700,000 for a qualifying couple.  Are we talking to our clients about using their annual allowances, gifts out of income, Will Trusts, DGTs etc?  Huge amounts of uncertainty about the UK's Long-Term Care provisions means that one of the safest ways for elderly people to protect their estate is to engage in some limited IHT planning.

Pensions Tax Relief - as you know, we now see the loss of higher rate tax relief on pension contributions for those earning more than £130,000.  Those of us who have HNW clients need to be talking to them in some depth about how their packages are structured.  Salary sacrifice may do wonders, not least because of the additional NIC saving.  Please note that although the primary restrictions do not come into force until 06/04/2011, there are transitional rules and restrictions in place already.

EIS - a whole package of tax-reliefs, including 20% income tax relief and the ability to defer the taxability of other capital gains.  Higher risk investments aren't for everyone, but for the right client, the maximum investment limit of £0.5m for income tax relief, may be a very relevant tool in your investment armoury.

VCT - effectively a collective investment scheme that invests in a range of EIS-type investments.  Look on it as a way of pooling your EIS risk.  The main VCT relief is 30% on income tax, but the investment itself (up to £200k per tax year) enjoys tax-free income and capital gains.

Engaging with the RDR

With the release of the FSA's Policy Statement 10/6 in March, the momentum within the whole RDR initiative notches up a gear.  This takes us past the previous Consultative Papers and moves us more towards the detail of implementation.

Barring some totally unforeseen eventuality, the RDR is going to 'happen', and it is therefore worth teasing out some of the themes and issues that we'll need to contend with over the next three years:

1. The RDR will threaten some IFA firms.  Our diagnosis is that their business models were probably, in any case, unsustainable. For such firms (those unwilling to adapt), all the RDR will do is hasten the inevitable.
2. The FSA has very probably underestimated the compliance costs of the RDR.  Our own experience of the Regulator's research into intermediary firms indicates that, very often, estimates for costs were simply grabbed out of thin air.  It is likely that the total cost of implementation may be as high as three times the original estimate - the message for IFA firms is that we cannot hope to make the transition without a concerted commitment to the process.  Our profession is going to change radically - it needed to do so, it was long overdue for such a transformation, and the cost is at this stratospheric level, because we left the initiative to the bureaucrats.
3. Most IFA firms are currently focused on upgrading their qualifications - but they are not imminently focused on implementing a new charging structure (a la 'Adviser Charging').  The evidence is that such firms will be missing a very significant trick - altering our remuneration model will affect how we deliver advice and services, how we select and recommend products, and how we engage with our clients.  If we defer our strategic planning on charges until the last minute, the danger is that we will botch our entire service offering.  2020 Financial Services' Members will be pleased to know that our national backoffice infrastructure includes possibly the best framework for fee-based advice currently available in the UK, so you can be 'RDR-Ready' now.  Please click here for more information.
4. The RDR will alter the market for certain kinds of products - for instance, one wonders where, in the 2012 world, we'll find a place for investment bonds, in preference to alternative wrappers for holding collective investments?  Our own research to date indicates that relatively few intermediaries select investment bonds on the basis of the specific characteristics of the tax-wrapper.  Theoretically, at least, the RDR appears to be expanding the IFA's access to investment products or asset classes - given that these may, potentially, include ETFs and SCARPs, great care needs to be exercised when designing your own in-house investment proposition.
5. The RDR will not be implemented consistently - in that pure protection products look like remaining outside the new 'adviser-charging' framework.  This is an odd anomaly, given that the FSA has already identified in its 'Financial Risk Outlook for 2010' that intermediaries may now be advising on products that they do not fully understand, to replace areas of advice that have died a death during the credit-crunch.  Apparently, there are 'good reasons' for this somewhat schizophrenic approach towards implementation, which leaves financial-planners in an interesting position as they seek to straddle two entirely different remuneration models.

2020 Financial Services' Members should be actively grappling with the issues now.  The latest version of our Best Practice Platform includes a thorough discussion of the subject, starting on page 99 - and new, practical implementation tools are on their way!

2020 Financial Services is delivering the 'Transitioning your business to a new world' workshop at the ICAEW Financial Planning Conference on May 24th 2010.

Please click here for more details