A pivotal year for planners
Jacqueline Lockie CFPTM Chartered FCSI, deputy head of financial planning at the CISI, reflects on how significant developments in 1992 have affected the financial planning profession today
In 1992, the average UK house price was £68,634, a gallon of petrol cost £2.13 and the annual rate of inflation was 3.7%. Interest rates at the year-end stood at 6.88%, the FTSE 100 average was 2,500 and the Maastricht treaty, which founded the European single market, was signed on 7 February. In Downing Street we had John Major as Prime Minister. Looking back, some things have hardly changed at all and others either have, or are, changing significantly.
In the financial advice world we were post-Black Monday (October 1987) and polarisation (April 1988), and the market comprised mostly tied advisers, with some independent advisers. The emphasis was still on commission-based fees as clients did not widely accept the notion of paying explicitly for advice. Campbell Edgar CFPTM Chartered FCSI, head of financial planning at the CISI, recalls that the old Life Assurance and Unit Trust Regulatory Organisation (LAUTRO) commission rates were his first foray into ‘time value of money’ calculations. The indemnity commission was based on a discounted cashflow of premiums on the product being sold, so he used to manually check the commission calculation. The product quotations at that time were typically seven pages long, with regulator-prescribed wording and formulae. However, as long-standing member of the former Institute of Financial Planning (IFP), now merged with the CISI, James Martineau CFPTM Chartered FCSI recalls, there was no mention of the commission paid on a product in those seven pages. There was usually an eighth page – listed as ‘1 of 1’ – stating the amount of the commission. The client rarely saw that page because there was no requirement to disclose the amount of commission being paid until hard disclosure was introduced in 1995.
In 1992, the financial advice world consisted mainly of cold-calling advisers selling products to individualsThe financial world was polarised, with stockbrokers dominating the management of large trusts and the wealthiest of clients and financial advisers selling products to the mass market. Those few who were doing full financial planning at that time were generally members of the IFP. Jon Golding, Chartered FCSI, one of the founding members of the IFP and also a long-standing member of the CISI – originally called the Securities Institute – recalls that in 1992, the financial advice world consisted mainly of cold-calling advisers selling products to individuals.
Many advisers who wanted to differentiate themselves from the cold-calling product selling group joined the IFP using the term ‘financial planner’ instead of ‘adviser’. Members of the IFP who wanted to do financial planning, in which the cost of the advice was separated from the cost of a product, sought out like-minded people there. (The CISI’s membership in 1992 initially comprised 4,800 members from the Stock Exchange, followed by practitioners from a range of investment activities, including investment management, corporate finance and settlement.)
However, as another long-standing member of the former IFP, Howard Gannaway CFPTM Chartered FCSI recalls, it was not all plain sailing. He was at the 1992 annual conference, surrounded by many different sorts of advisers, product sellers and even shipping container leasing salesmen, thinking: “I wonder how we are going to get all these people to do actual financial planning?”
Educating advisersHoward was one of the first to sit the College of Financial Planning’s exam, designed to educate advisers on how to do financial planning, which was growing in popularity in the US. At the same time, the University of the West of England in Bristol was introducing the first financial planning degree. The late Jonathon Timms was a star pupil on that course. His family sponsors the annual award for the highest mark passing the CERTIFIED FINANCIAL PLANNERTM accreditation assessment each year, in his name.
At the 1992 conference, the IFP chairman, Tony Shepherd, gave a moving speech in which he asserted that the Institute believed in financial planning first and foremost, transparency of fees to all clients and not product first, with no mention of the large rates of commission being paid to advisers. It was one of financial planning’s pivotal moments. Articles about that speech were published and persuaded many of today’s most well-respected planners, who were struggling to tolerate the commission-hungry environment, to find a home in financial planning.
The burden to provide for our own financial future falls increasingly on us as individuals
Clients of advisers generally had no strong opinion about the way in which advisers were paid for selling them a product. Some, including a number of advisers, naively thought that the insurance company or other product provider paid the commission, which was factually accurate, but they did not realise that this money was coming out of the cost of the product that they were buying. This was because, in 1992, advisers were trusted by their clients, who had no reason to think otherwise.
Breakdown in trustThis changed in 1993/4 when the pensions misselling scandal broke and the pension scheme black hole at the Mirror Group, the newspaper group owned by Robert Maxwell, was uncovered. The Maxwell scandal later brought changes to legislation to protect pension funds, but the pensions misselling, which affected many nurses who were encouraged to leave their occupational pensions scheme at that time, contributed to the breakdown in the trusted client-adviser relationship.
This is because in many cases, proper analysis of whether an occupational scheme employee would be better off outside the scheme was not performed. Instead, many advisers appeared to be recommending that individuals leave these pension schemes and buy a private pension without explaining the risks involved. These advisers would benefit from the commission payment earned from setting up that new policy. This caused the regulator to bring in more stringent documentation requirements during the advice process, and later to insist that all advisers giving pensions advice must pass a pensions specialist examination.
At this time there was also a technological revolution going on in the background. Prestwood and Plato software systems were available to planners who wanted to offer cashflow planning advice. However, the technology savvy also started to take advantage of the availability of generic spreadsheet programs to develop their own customised tools to help with their business requirements. As technology became cheaper and more accessible, many more advisers realised the benefits of using software packages, and started to buy into the financial planning and cashflow planning model to use with their clients. Many realised that these software systems were enabling them to provide an added-value service for which clients would pay, and that planning as a service also set the advisers apart from the product salesmen in the industry at that time.
So the need for advisers to differentiate themselves from the mass market, the increasing availability of cashflow planning software and the pensions scandals all served to make existing and potential clients question what they were paying for, how they were paying and whether the costs were reasonable, along with how their adviser could best serve them into the future.
The futureThe need for financial planners to differentiate themselves from advisers hasn’t changed. The term ‘financial planner’ is still being used by many who are not actually planning. The term, as in 1992, cannot be trademarked, so it is open to interpretation and abuse. Differences are more subtle these days. Many will argue that they are planning when they are selling products to fulfil a specific need; others will say that financial planning must include the now commonplace cashflow analysis. One thing is clear: the impact of technology and, specifically, cashflow analysis software, in the advice process is what can make a real and lasting improvement in the quality of advice given to clients. But you cannot use this in isolation. Advisers need good and up-to-date technical knowledge to go along with that.
Looking forward, as citizens, we are facing a continual restriction in support from the state and the burden to provide for our own financial future falls increasingly on us as individuals, whether that be in healthcare or in retirement. In the advice process, the use of cashflow analysis tools, combined with technological improvements in back office systems and continued improvement to risk profiling tools, should reduce the time and cost burden on those giving advice. The younger generation is likely to increasingly use apps to do some of the planning themselves, possibly with guidance from a planner if they can afford one; but the important thing is that these changes will help the wider population engage and take charge of their finances. These things, I hope, will increase the number of people who understand what financial planning is and become clients who planners can help, ultimately making financial planning more widely accessible to all.
This article was originally published in the Q2 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.