We have just finished our round of case studies of the use of technology in the adviser world. From the fifteen adviser firms we interviewed we would draw the following conclusions:

* The top distributors have woken up to the benefits in technology and are investing heavily to support their businesses
* The networks are moving to a model of part mandatory use of technology (usually around the submission of business)
* The networks are aligning themselves with particular IT vendors – IntelliFlo, Focus, Distribution Technology and 1st – The Exchange are winning these battles
* The Smaller distributors use a wide variety of technologies and are gaining real business benefits: IntelliFlo and 1st – The Exchange are doing well in this sector, as are Plum and Bluecoat Software
* Product and Fund research tools are also gaining a strong presence with Morningstar, Synaptic, OBSR and Defaqto being most frequently cited
* FinQS’s TCF centre is gain traction in supporting both the smaller IFAs and the networks

During the case studies we covered many different business models and lots of different uses of IT. It has become clear that despite the predictions of doom after 2012, parts of the distributor market are resilient and many are now preparing and will be ready for RDR. Our interviews were however with the leaders in the industry and we are well aware of the horror stories about how many distributors aren’t doing the necessary preparation for RDR. Indeed a recent moneysupermarket.com survey claimed 18% of IFAs were waiting until 2012 to start changing to become RDR compliant.

Hopefully our articles will encourage some of these to change their mind and use technology to re-engineer their business now, so they can start reaping the benefits now and not wait for 2012.

I was recently criticised by one software supplier for describing them as small in our Professional Adviser technology column. I hadn’t done this to insult or demean them, in fact quite the opposite. In the context of the article I was trying to convey that they were nimble and that all their clients really mattered to them and received responsive attention and service. However, the comments did start me thinking.

The big companies have deep pockets and can, if they choose, weather difficult market conditions. They also have access to wider resource pools to help on big deliveries and have the ability to pour substantial R&D budgets into new solutions. The benefits are significant if large corporate projects with substantial amounts of bespoke development are being considered.

It would be a mistake however to think size brings with it certaintly of stability. The cost bases of larger companies are frequently a lot higher and when markets move against a company or product, then these companies may have less scope to reduce them and can quickly become vulnerable. It is particularly true when discussing a division of a larger company where the relative size compared to the overall organisation is very small. I once worked for AT&T, a huge global company, which had a reasonable presence in financial services in the UK (owning a third of The Exchange at the time). However, the relative size of the UK business compared to the US was so small that it closed the UK operations virtually overnight without batting an eyelid and leaving some clients poorly served.

Some of the smaller companies – if focused on a niche area, may actually have more domain knowledge than exists in much larger organisations and may be closer to the clients and more nimble in how they respond to market opportunities. In terms of financial longevity, some relatively small firms have a substantial user base and therefore will always be of value in the market and even if they hit hard times, a competitor may buy them to access the user base.

The bottom line is for product-based companies, I think size is not of over-riding importance, as long as a critical mass of clients is reached and as long as the company is in good financial health. If the companies product and service is compelling and the management team is sound, then success and longevity should follow. For service delivery organisations, size does become important and prospective clients would do well to check that the resources of development partners are not going to over stretched before they contract with them. So, back to the company that took offence at my comment about them being small, perhaps their repost should have been – ‘they don’t make diamonds as big as bricks’!

Last week I mentioned that Dan Waters of the FSA, had commented in a speech to a McKinsey’s Conference about Wrap and the FSA’s forthcoming explanation of their ‘deliberations’. In the same speech, Dan also talked in detail about how the FSA is looking to extend its view of the investment value chain to look at product governance and oversight.

The FSA has traditionally focused its regulatory attention on the point of sale transactions at the end of the value chain. As most of you will know, this includes things like Key Features, Adviser status and commission disclosure, as well as rules on how performance is presented. The FSA has become increasingly concerned that this focus and potential for intervention may be too late, and could leave the door open for more ‘mis-selling scandals’, which they are determined to avoid in the future.

Dan Waters has a specific interest in tackling risk management as he is the first ‘Director of Conduct Risk’ at the FSA. As a result of his view that the regulatory focus may be too narrow, he is looking at how they look more deeply and further up the value chain to include product design and oversight by the product providers (manufacturers). In doing so, the FSA intend to look at the business models of providers to see what the core strategy and drivers of income and profitability are. They will be looking up-stream of the point of sale including product development and marketing, as well as down-stream at post-sale handling and servicing. Whilst you may think that this would be covered and motivated by the obligations of TCF, the FSA seems to be unconvinced that Providers are designing products that add customer value or address real needs. Dan Waters believes that Providers are focused on designing what can be sold, or trying to beat a competitor, rather than trying to meet the needs of the consumer first and foremost.

How will this extension of supervisory scope manifest itself? Well it would seem that the FSA will be looking to test consumer outcomes (and/or see what testing the Providers have done?). They will be looking at stress and scenario testing to see what type of customer is and isn’t appropriate for the product and checking to see if the Provider has been clear about what the product does, who it is for and if certain key characteristics such as the nature and scale of risks is properly presented. The stress testing should look at a range of market conditions that could trigger certain product features that may not be immediately obvious or expected in normal conditions. The triggering of MVAs on With Profit Bonds in the past was a surprise to some customers (and advisers!) and I expect this is the sort of area that the FSA will want to expose as a potential risk. The process should be part of a systemic and objective assessment that is built into the existing supervisory framework.

Some may fear that this interest in the product governance and design is leading to a situation similar to some EU Countries which regulate product design. Dan Waters said that this wasn’t their intention. However, it is clear that whilst the spotlight on distribution is not changing, the spotlight is going to be extended to look at the products themselves and the motives and behaviour of the manufacturers. RDR is likely to cause some Providers to redesign parts or all of their product portfolios. In doing so, they should bear in mind that the FSA is going to be keeping an eye of what they build and why, as well as how it is sold.