Non-intermediating Financial Planning (NIFP) is financial planning without financial intermediation.
Financial planning is the process of determining a person's or firm's financial needs or goals for the future and the means to achieve them.
Financial intermediation is being an appointed agent of one or several product providers and deciding which of their investment products would be most suitable under both personal and broader economic circumstances.
A Non-intermediating Financial Planner (NIFP) is a financial planner who is not a financial intermediary.
Some financial intermediaries have set up a separate financial planning process or firm. Where financial planning is offered for a fixed fee and is not conditional on financial intermediation, such services can be equivalent to NIFP provided that there is a wall between advice and product distribution. You can have one service and not the other.
It is particularly difficult to consider financial planning as truly "independent" where the financial planner is also the financial intermediary. Here the client needs to satisfy themselves that there is "blue water" between advice and product distribution. For example, financial planning is not separate where it is conducted with a view to financial intermediation, there is inadequate signposting to direct to consumer channels, or where the adviser's remuneration is conflicted.
For some years now, the retail investment market has been commoditised. That is, there is little to differentiate between the money management systems that can be accessed directly by consumers and those operated by distributors who tap into the assets for their fees.
In the words of Christopher Woolard, the Interim CEO of the UK's Financial Conduct Authority (FCA) in September 2020:
"The overwhelming majority of retail investors are best served by readily understood, well-diversified and low-cost investments which are already available from a range of providers, but many retail investors don’t choose these."
Investment intermediation, like investment returns, is now commoditised. What used to take financial intermediaries 15 hours to do for a large percentage of your life savings (3% plus 1% per annum, say), can now be done in 15 seconds for no initial charge whatsoever and a smaller annual percentage charge (0.5% per annum).
Cost savings over a lifetime can be significant.
Sometimes financial intermediaries claim to offer far more than basic financial intermediation for the price. Though that might be the case, the additional work that they do is financial planning and can be done for a fixed flat fee that is reasonable relative to the benefits provided.
In May 2021, the FCA added, "Firms (financial intermediaries) offering the same charging structure to all consumers may also not provide fair value. Whilst it may often be fair to do this, it may not always be fair where, for example, servicing fees are charged as a percentage of the value of a product (this might be in relation to the size of a loan, investments, or savings). Some consumers may pay substantially larger fees in this way even though the costs of providing the service and the benefits consumers receive may be remarkably similar. In such circumstances, firms should consider whether the relationship of the price such consumers would pay is reasonable relative to the benefits they receive."
We believe that financial planning creates value for people, far more than financial intermediation. And the price consumers pay must be reasonable relative to the benefits they receive.
People create wealth with work. With plans, vision, talents, entrepreneurial spirit, and discipline. Products simply manage the wealth that has already been created. You need to already have wealth to buy a wealth management product. The primary focus of financial intermediaries is to intermediate between wealthy retail investors and wealth management firms. No financial product creates wealth!
FINANCIAL INTERMEDIARIES DO NOT PROVIDE FINANCIAL PLANS THAT CREATE WEALTH.
According to the UK Office for National Statistics, 95% of UK households have less than £100,000 in Financial Assets (investable assets, not including property assets, business assets, occupational pensions, and physical assets). Typically, UK Financial Intermediaries set an investable asset threshold of £100,000 to ensure profitable practice management. That is how they get paid, 90% take a percentage of the investment as a fee. No investable asset and the intermediary does not know how he or she will get paid.
That is, 95% of UK households are underserved by the financial intermediary market and need to create wealth before they can access financial intermediary services. They are disintermediated.
Many wealth management firms believe they can bridge the "advice gap" of disintermediated retail investors by introducing low-cost automated non-advised sales solutions. Solutions that sell products.
Here is the thing ...
The underserved need plans not products. They need non-sales advice solutions. They need wealth-creating plans.
NON-INTERMEDIATING FINANCIAL PLANNERS PROVIDE PLANS THAT CREATE WEALTH.
This wealth creation plan closely resembles business plans, including year-by-year profit & loss accounts and balance sheets. They are delivered by utilising business planning tools and lifetime cashflow forecasting tools.
The cost of delivering financial planning is far lower than the cost of providing financial intermediation.
Globally, financial planning is typically a non-regulated activity. By removing regulation from the process, the planning firm removes over half of the operating costs of running the business.
Margins are improved for planning firms, even after considerable cost savings are passed on to the client. The potential cost savings diminish when tax is considered. In the UK, financial planning is subject to Value Added Tax (VAT). Whereas financial intermediation is not. Also, financial intermediation fees can be facilitated by deductions from the tax-favoured product.
The big gain in cost savings materialises when we consider what a NIFP can do that a Financial Intermediary cannot. Financial intermediaries must make personalised recommendations. This can only ever be delivered on a one-to-one basis. The financial intermediary exchanges time for money. Time is limited, so the capacity to service clients is limited and the cost of service delivery is high.
NIFPs on the other hand exchange know-how for money. Generic advice and financial education can be delivered to groups. Fees can be divided by the size of the group - or for Netflix-style operations, by the number of service subscribers.
NIFP services are available to everyone at a fraction of the cost of traditional financial intermediaries.
The cost of service delivery for NIFPs is low.
In most markets, providing advice on the buying and selling of investments is a regulated activity. The conduct risk lies in the selling, or rather the mis-selling, of investment products. This risk can be mitigated by separating advice and distribution.
Imagine how the conduct risk is mitigated if you take away the product sale.
Using the UK as an example, the FCA's Perimeter Guidance clearly sets out where the demarcation line falls. PERG 8.26 states that financial planning is not of itself a regulated activity. It lies on the advice side of the wall!
Financial planning becomes a regulated activity if it is provided with a view to providing another activity that is regulated. For example, financial planning is regulated where it is provided with a view to financial intermediation. That is when there is no wall.
Providing life planning, financial planning, generic or general advice on types of investments, financial education, publicly available surveys, studies, or information, lifetime cashflow forecasts, explanation of product features and benefits, financial accounts, generally are not regulated activities. In fact, everything a retail consumer needs to make well-informed decisions can be accessed without recourse to a financial intermediary.
The financial intermediary tells the consumer what to do. Everything is done for you. And, that advice is typically to buy more products, for the adviser to tap into for fees. Asking the adviser to run your money is seldom the most optimum solution.
For do-it-yourself investors, the provision of studies on low-cost investing, education on diversification and behavioural economics, and comparison surveys on accessible direct-to-consumer platforms, all ensure that they can make a well-informed decision on buying or selling investments.
When asked for an opinion on the buying and selling of a particular investment, the NIFP simply highlights in a balanced way the accessibility, options, features, benefits, and charges available to the investor of direct to consumer or advised routes for the investor to make a well-informed decision.
Surveys show that whether advised or not the most popular outcome is readily understood, well-diversified and low-cost investments that are already available from a range of providers. Why pay the extra for intermediation?
Nine times out of ten, the financial plan recommends "work" (what you do for a living) not products. That produces the all-important income-producing asset.
Artificial intelligence systems (Robo-advisers) produce recommendations to increase income or reduce expenditure when there are shortfalls in income versus expenditure.
Conflicted remuneration financial intermediaries recommend selling you investment products instead, that they tap into and take a fee. Investment products simply move money from the fridge to the freezer. Work creates wealth, not product.
“Show me the incentives and I will show you the outcome.”
That is a Charlie Munger quote about how incentives drive nearly everything.
Generic advice (setting out in a neutral manner the facts relating to investments and services with no spin) is not a regulated activity under the European Securities and Markets Authority (ESMA) or Insurance Distribution Directive (IDD) or the Markets in Financial Instruments Directive II (MiFID II).
For the advice to be regulated in the EU it must involve an element of opinion or judgement on the part of the adviser. Regulated advice involves recommending a course of action or making a judgement on the merits of exercising a right, such as to buy or sell. Generally speaking, giving someone information and nothing more is not a regulated activity. Giving facts about the performance of investments or the price of investments does not constitute regulated advice if the investor is left to exercise his or her own opinion on the action to take.
For example, in Spain, only advisers authorised by the Comision Nacional del Mercado de Valores, or CNMV for short, (National Securities Market Commission) or Bank of Spain can give advice on investments, with the exception of passported permissioned advisers.
NIFPs do not under any circumstances solicit money from clients, or make a judgement on the merits of exercising a right, such as to buy or sell, or give advice on particular investments, nor do they give personal recommendations.