IFAs ■ PARAPLANNERS
Going back to basics Third party paraplanners are growing in popularity for medium and small firms that cannot afford to have them on staff. It seems an ideal solution on the face of it, but do the benefits outweigh the drawbacks? Geordie Clarke finds out
growing number of financial advisers are turning to outsourced paraplanners in an attempt to free up client meeting time lost to hours spent writing financial reports. It is a trend brought on by tightened FSA regulations that oblige advisers to write more detail into their client reports in an effort to be compliant with the law. The additional time spent writing reports has advisers turning to a new breed of paraplanner, as described in Box 1 , so that they can focus on their core strengths. But in medium and small firms that cannot afford these research specialists, the job of writing financial reports still falls squarely on the adviser. But now there is respite for those who need it. The year 2001 saw the launch of the first outsourced paraplanning company; today there are half a dozen outsourcing firms and countless freelancers. Proponents say that outsourcing is the answer to a crippling workload, while critics argue that it could lead to sloppy reports.
all hours of the day. By outsourcing, advisers gain all the benefits of an inhouse paraplanner without the financial commitment. And, in some cases, large firms may also seek an outsourcing company when their own paraplanners are overworked. “People call us because they want to free up their time,” says Lee-Anne Craven, managing director of paraplanning company HowWhyWhen. “They don’t have the support inhouse and they’re stretched to the maximum, so they come to us because we can take the work off them.”
What is available? Details of current outsourced paraplanner firms are shown in Table 1 . Four of the companies listed, including Adviser Assist, The Timebank, Paraplanning Direct and HowWhyWhen, prefer that advisers will commit to long term relationships. Adviser Assist is unique in that it charges a £250 monthly retainer to promote regular use, and requires two months’ notice if advisers want to stop using
Time and money Cost efficiency, time savings and flexibility are the major reasons for using outsourced paraplanners. According to Richard Allum, co-founder and managing director of the paraplanning firm Adviser Assist, the target market for his company is medium and small firms that cannot afford paraplanners. And the cost savings that outsourcing represents can be significant. Allum says that the advisers who use his service spend in the range of £4,000 to £25,000 on his service in a year. While that may seem steep, it is much less than the cost of having even one full time paraplanner on staff. This is because in recent years paraplanners’ wages have skyrocketed as demand for their skills outpaces the number of new recruits entering the market. Financial Adviser reported recently that the average salary for paraplanners in Scotland has risen by 60% since 2005, with recruits earning more than £40,000 pa, up from £25,000 pa just two years ago. In the rest of the UK, the situation is similar. Darren Mackie, a consultant with recruitment firm Envision, says that paraplanners command no less than £30,000 pa in today’s employment climate, and as much as £60,000 pa in London. But cost is not the only reason to outsource. Alan Smith, managing director of Capital Asset Management, says that his team of four advisers decided to outsource their reports because it was more efficient and helped them gain back client meeting time that was lost to administrative obligations. “The only alternatives are: don’t produce reports, or do them yourself. I don’t see any of those as viable options,” Smith says, adding that “hiring full time, trained paraplanners means they won’t always be busy.” This is an important factor for small firms that are subject to the ebb and flow of busy periods and slow periods. In these situations, they cannot justify having a specialist on staff who will not be busy 64
MONEY MANAGEMENT ■ SEPTEMBER 2007
Box 1 : What is a paraplanner? The paraplanner works behind the scenes in concert with the financial adviser researching products and market data and preparing suitability letters and financial reports. The exact origin of the term ‘paraplanner’ is unknown, though some believe it is an American import, while others believe it was borrowed from the legal profession where paralegals work in an administrative role for solicitors. The definition of a paraplanner can be many things to many people, but today they are highly qualified, holding the same qualifications as advisers, including the Certificate in Financial Planning (CFP) and the Advanced Financial Planning Certificate (AFPC), as well as additional industry qualifications. Whereas in the past a paraplanner may have been viewed as an office administrator who was training to be an adviser, these days they are professionals in their own right, often with five or more years of experience that have given them valuable industry knowledge. Someone who is a paraplanner enjoys the technical side of the business and prefers not to be an adviser who meets clients and closes deals. They enjoy financial planning, but prefer to do research and prepare financial plans. For the adviser who wants to focus on core duties and move away from the technical side of the job, a paraplanner will: ● Prepare suitability letters, pre-advisory reports and full financial plans from information provided by the adviser ● Research products where appropriate and recommend a suitable one for the client ● Research market data and form an investment plan ● Provide technical support to the adviser, eg tax and pension calculations ● Prepares reports to the adviser’s style, containing all logos and letterheads.
PARAPLANNERS ■ IFAs
the service. The other companies listed do not impose retainers, but use contracts to ensure that advisers commit for a long term, although no specific time periods are stated. Paraplanners say that they produce the best results when each party knows what the other is expecting and that it can take six months or more before they are in tune with each other. “You expect that they’re going to stick with you for five years,” says Craven of HowWhyWhen. “It takes a lot of work upfront to develop that relationship.” For advisers who only want to outsource occasionally, there is plenty of choice. Three companies, Hately Services, IFA Angels and The Ethical Angle, all will produce reports on an ad hoc basis. The fees that outsourcing companies charge for reports vary greatly. Prices for individual reports start at £150 and top out at £500. The major determining factor in the price is the financial report’s complexity. For example, if there are a number of tax and pension calculations to handle, the cost would increase in proportion to the time required for research and writing. At Paraplanning Direct, the average report costs £200, while at HowWhyWhen a report can cost as little as £150 or top £400. At Adviser Assist, a typical report costs between £400 and £500, with the first £200 of the retainer acting as credit towards this fee. But these costs should not be seen as impediments, says Damian Davies, founder of The Timebank. Instead, they should be seen as adding value to the adviser’s work that generates added revenue from the client. Plus, the costs can often be charged to the client, wiping paraplanning off the adviser’s books. Financial reports are supplied as electronic files, often PDFs, formatted to the design and style preferred by the adviser. The documents contain all logos and colours of the tendering firm and show no evidence that a third party created them. While some companies, such as Paraplanning Direct, choose to write streamlined reports about 10 pages long that contain all the information the client needs and nothing that they do not need, other companies, like Adviser Assist, HowWhyWhen and The Timebank say that their average reports are at least 20 pages long and can hit 40 or 50 pages if they are complicated. Contained in each of these reports are sections that review the client’s financial circumstances, their objectives, the options available to them, a suitable strategy as chosen by the adviser or paraplanner, the products available, the strategy and the risk warnings for using that strategy. In all cases, the financial plan must of course justify the reasons why one product was chosen over another, and why the investment strategy is ideal for the client. “Most advisers that do use us, basically are looking at us as an integral part of their business,” Davies of The Timebank says. He adds that the only way to ensure success with outsourcing is to use team work and keep in close contact with the adviser. This is why several firms, including HowWhyWhen, The Timebank and Paraplanning Direct, take only long term clients and refuse ad hoc work. They say this ensures that the quality of their reports is always high and the number of errors and unhappy customers is kept to an absolute minimum.
Table 1 : Paraplanning companies Company Adviser Assist Chinnor, Oxon T: 0845 125 9644 Hately Services Peterborough T: 0845 125 9644 HowWhyWhen Hertford T: 0845 227 0424 IFA Angels Norwich T: 01953 888422 Paraplanning Direct
Founded No of Fee planners 2001 4 Retainer + per report 2006 7 Per report
Ad Commit hoc -ment No Yes Yes
Per report No
Per report Yes
Per report No
Per report Yes
Per report No
Sittingbourne, Kent T: 01795 437 585
The Ethical Angle Sheffield T: 0114 236 8168 The Timebank Hereford T: 01432 853 008
Most important among the drawbacks is communication. The adviser must work closely with the paraplanner throughout the entire process sharing ideas and ensuring that the adviser’s wishes are met along the way.
Legal concerns The most important point to be borne in mind when using a paraplanner firm is that the adviser is as accountable for the outsourced paraplanner’s work as for that of an inhouse paraplanner. “No one can outsource their regulatory responsibilities,” says FSA spokeswoman Sam Bennett says. “The paraplanner does not deal directly with the client, so therefore it is not a regulated activity.” In effect, the outsourced paraplanner is invisible to the adviser’s client. This is partly to avoid confusion over who is providing the financial advice and partly because advisers and the FSA treat outsourcing companies in the same way that they would inhouse paraplanners. Additionally, advisers must also be aware of issues surrounding indemnity insurance, privacy protection laws and industry software licences. With insurance, advisers must approach it in the same way as FSA regulations: they are ultimately responsible for all advice supplied and any mistakes that are made. But where advisers must be particularly careful is in data protection and software licensing. It is important that advisers ensure that the paraplanning company is registered under the Privacy and Data Protection Act 2004 and that all confidential information will be stored and handled in accordance to the law. Furthermore, advisers must also include, within their terms of business with clients, clauses that will allow them to pass on their personal information to the appropriate third party, be it the paraplanner, insurance and investment provider or research software systems. The absence of these licences could raise legal problems with the regulator and the Financial Services Ombudsman.
A flexible solution
Opponents to outsourcing worry that advisers are transferring control of financial planning to third parties and, in the process, are foregoing personalised reports in favour of generic templates. Jock Cassidy, director of IFAs Ashley Law, says that paraplanning “is not a service that ideally lends itself to outsourcing” and would be extremely difficult to make work on a practical basis. He adds that the paraplanner and adviser have to work in close affiliation in order produce detailed, effective financial reports, whereas those who do it at an arm’s length will be less efficient and result in lower quality work. Allum of Adviser Assist agrees that outsourcing has its drawbacks and will not work for everyone, but he says that these problems can be avoided if advisers and paraplanners take the right measures.
Drawbacks and caveats aside, outsourced paraplanners are proving to be a successful business since they first appeared six years ago. Following on the heels of the Australian outsourcing market, which started about 12 years ago and has since matured into big business, the British version is still very much occupied by a few small companies that are developing the field. But despite this youth, outsourcing can be a major boost to firms needing to free up time to meet more clients and increase their revenue. Advisers who choose to outsource can steer clear of possible headaches and legal problems so long as they recognise that outsourcing still requires the same input and due diligence as when they wrote their financial reports in house. It may not work for everyone, but the benefits appear to outweigh the drawbacks. SEPTEMBER 2007 ■ MONEY MANAGEMENT
Published on Sep 10, 2008