I was talking with an adviser recently and recalled Adam Smith’s visit to a pin factory described in the ‘Enquiry into the Nature and Causes of the Wealth of Nations’.
“…a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.”
Often an adviser will meet a prospective client and be faced with a set of challenges that they may not have dealt with before. The particular individual the adviser I was talking with encountered was a foreign national living in Ireland and the adviser, knowing that I specialise in consulting in this area (not least because I am a foreign national living in Ireland), called me to discuss the matter.
Now, any meaningful description and analysis of the technicalities of residence and domicile planning is above and beyond anything that I could cover in this post but suffice to say it’s a relatively complex subject and the scope for providing potentially unsuitable advice in these situations is quite considerable.
I’m currently writing a summary of the impact of MIFID II and the actions that advisers need to take in order to comply with the changes introduced into the Consumer Protection Code and I’m now firmly of the view that when an adviser draws up their target market assessment, if they don’t list a particular client niche (such as foreign nationals living in Ireland) as being part of their target market, then by definition they won’t have a process around providing suitable advice to that niche and, consequently, the risk of providing unsuitable advice goes through the roof. This is not to say that a process can’t be developed, but this really isn’t something advisers should be doing on the fly.
The more complex the needs of a niche, the less likely an immediate and suitable solution will present itself. For example, advisers who discover that a client is a US Citizen should not attempt to engage with the client unless they have previously researched and implemented a robust process around dealing with the considerable challenges that this niche faces.
Back to Adam Smith. The division of labour in the pin factory, it has been argued*, was as a result of the machinery developed on the production line not the other way around. Workers were skilled to operate a particular machine and that led to productivity gains. But due to the unskilled nature of the pin making work, the workers could be trained to operate any of the machines, so it wasn’t too difficult to solve the issue of producing pins on the new machinery – it just took a bit of training.
Contrast this with Financial Advice. Hardly unskilled is it?
Financial advisers like to make comparisons with other professions like doctors and lawyers, yet in practice, many fail to understand the importance of the flexible specialisation that we see in these professions. Think about a typical law firm; there will be specialists in Family Law, Commercial Law, Litigation etc.
Around the world the most successful financial advisers have put time and effort into finding a niche and developing the particular skills and knowledge to be able to serve better the needs of a particular set of clients. They have not attempted to operate in the product-focused broker world where advisers attempt to deal with every prospective client.
It seems counter-intuitive to many advisers that to be more successful they need to turn away some prospective clients that simply don’t fit with their target market.
I believe that we will be able to say that Financial Planning is a true profession when a prospective client meets with a financial adviser and the adviser says; “I’m sorry, I’m not familiar with your particular needs and so I’m going to refer you to colleague who specialises in your requirements and who will be able to provide you with much more suitable advice than I can.” Keep an eye out for our regulation white paper which will be out shortly.