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Regulatory Background for Change
In 2012 the FCA pushed financial advisers to move from a “commission” model to a fee-based model, in an effort to improve customer outcomes.
One outcome for the financial services industry was the requirement to enhance their “know your client” or KYC process. Simply put, if you didn’t know your client as an adviser, you couldn’t offer a client-centric service proposition.
When the FCA mandated an “advice led” industry, rather than commission-based model, it radically changed the shape of the industry and many lessons can be drawn for the accountancy profession.
In the first instance, the financial adviser dedicated more time to fact-finding on the client, to better understand their client needs and objectives. What is fact-finding or a “fact find”? Simplistically, it might look like this:
- Who is your client and what do they want for themself and their family in the short to long term?
- What is their financial position:
- Are they okay if something happens to them, like death or disability?
- What are their finances like, do they have excess cash, both now and going forward?
- Will they be able to achieve personal goals, like moving home?
- Will they be able to retire comfortably?
It may sound straightforward or plain sensible for accountants to do the same factfinding, but research conducted by All in Place indicated that only 9% of accounting firms documented their clients’ goals and objectives and less that 5% knew if their clients had a mortgage due to renew.
Industry Comparison
The accounting profession does not have a central regulator like the FCA, but it is bound by the “winds of change.” As the profession moves closer to a world embracing MTD and AI, the regulator is essentially the consumer – “the business owner.”
Business owners are facing their own economic challenges and want to know that they are getting access to the “best advice” for their business and the family dependent on it.
However, similar to the world of financial advisers pre-2012, the requirement to “really know your client” is the elephant in the room, as it is too easy for accountants to “sell” reporting and accounting services to the business, rather than establish what is important to the business owner.
Is the accountancy offer enticing enough?
A lot of accountants would baulk about the comparison to a financial adviser, but this is ill informed. Many financial advisers joining the industry today are graduates, who embark on becoming Chartered Financial Planners – akin to a chartered accountant, requiring 3-5 years of training.
Pay is good and the work rewarding. But here is a challenge to the accounting profession and its anxiety about the lack of resources – what makes the job interesting?
An analogy for example is, imagine a stroll down a tired high street. Potential customers are looking for something fresh and inviting, but all they see is the same old thing – unappealing shop fronts and nothing new or inspiring. The end result is they go elsewhere. Ultimately, you can’t keep selling the same stock. If the customer is looking for something different, other vendors will fill the gap.
Why would a graduate go into accountancy and stay?
It’s all about good culture
KYC may be one answer to firms’ resource issues. Perhaps controversial, but many accountants will see it as just another thing to stop them from doing their job – more admin from their Institute. Passing AML tests is simply the norm – a small part of KYC – but crucial in combatting crime funded in this manner.
Let’s try and put it a different way. Undoubtedly, many financial advisers complained about extra regulation back in 2012. However, the good ones saw it as an opportunity to tell their clients that “because of regulation” they had to ask more searching questions and document them. Rather than be a compliance headache, this simply became an opportunity to identify fee-earning opportunities for the firm and its advisers.
What’s the monetary value of this to your firm?
Since 2012, financial advisers have built client-centric value propositions, charging a fee for a service. This process has enhanced the lifetime value of the client – often the same client of an accountancy firm.
Stereotypically, accountancy firms sell for one times revenue, a bit more for digital firms. IFA firms often sell for 3-4 times revenue.
Same clients, lots of cashflow planning, lots of tax-based advice, but lots of rich data, together with a structured business model, with recurring fee revenue on offer.
However, accountants don’t deserve to be their client’s “family finance director” if they don’t know their client, which is why somebody else becomes the trusted adviser.
