Deane's chapter and verse
With commission on pensions soon to be abolished for good John Deane, chief executive of Scottish Life believes his life office’s time is about to come. John Greenwood finds out why.
Advisers chasing commission in the last 15 months of the old world of distribution could be storing up big trouble for the future, says John Deane, chief executive at Scottish Life. Given the provider’s well-publicised position on the debate over fees versus commission that may come as no surprise, but Deane suggests advisory firms reflect on what their cashflow will be like in 2013 before brushing the idea aside.
Deane’s warning centres on a combination of two problems the commission tap being turned off and the transfer of client risk from the provider to the adviser.
“If you look at advisers who have gone from commission to fee models, the perceived wisdom is that takes three to five years,” says Deane. “But a number of organisations will be trying to do this over the first three months of 2013. That will be painful.
“And while revenue models will change if heavily dependent on commission, it is unlikely their clawback models will change materially. It is then interesting for adviser firms to model the ’what if’ scenarios. If I am no longer getting indemnity commission and I am getting clawbacks, what does this mean for me? As we get closer to RDR, that cashflow modeling becomes hugely important.”
Deane paints a potential nightmare scenario for those firms currently yet to wean themselves off commission where they see their income nosedive from 2013, but with time start having to pay providers back when business walks. With no incoming commission to pay the clawback from, balance sheets could become seriously strained, he warns.
The counter argument is that post-RDR, when there is no more commission tempting advisers to churn schemes, persistency will be much improved, making clawback less of a concern than at presence. Deane believes this is an overly rosy prediction of how the market will develop from 2013.
“People are saying there will be better persistency after the RDR but I think that defies economics”
“People are saying there will be better persistency after the RDR but I think that defies economics. If you are sitting there as an employer and your employees are on a 1 per cent commission model and post-RDR a different IFA comes in and says I can give you a better deal, you are going to talk to them,” he says.
“IFAs who operate in that space may have to take a reduction in fees for business written post-2013. But the economics will be ’do I want to earn some revenue or do I want to earn no revenue?’ Not all will walk, but the arrogance of the industry saying persistency will be better is misplaced. If it is a different IFA and can give a better deal in a market when salary increases are going to be tough, then people will find that attractive.”
For Deane, that early pressure on advisers’ cashflow could dictate the approach they take towards consultancy charging, leading to a tendency in the early years post-RDR to take charges out of first year’s premiums rather than a contribution charge or an AMC type model.
“I believe it will move towards first year charges for two reasons. A number of advisers will be moving away from an indemnified commission model. If that is happening quickly, they are going to have to move to a first-year model. Over time they may move away from that. But you are putting into that the persistency risk. That puts the risk on the adviser. We may ultimately move to a world where different charging models become a competitive edge between advisers,” says Deane.
The second reason is the fundamental shift in new business risk from the provider to the adviser. “The difference post-RDR is that whereas previously the provider had to look at the scheme and say what is the average salary, how many staff are there, what is the persistency, etcetera, in future the advisers are going to have to do that. That responsibility is being passed from the provider to the adviser.”
“Corporate wraps sell product. They do not provide advice”
The prospect of some potentially cash-strapped advisers needing money up front to balance their books begs the question how much providers will agree to them taking out of contributions under consultancy charging. Like other providers in the space, Scottish Life is yet to decide whether it will install a decency level.
But Deane says Scottish Life will allow consultancy charges to consume all of an employer’s first year’s contributions, and even some of the member’s contributions where it has been communicated properly to members, even where they are not receiving face-to-face advice.
Asked whether you could have 100 per cent of an employer’s first year’s contribution, Deane says: “Yes, I would be happy to facilitate that provided it was clearly explained. You can take that, and part of the employee’s contribution if what is explained to the employee is the benefit of that. You don’t have to sit down to talk to them. It is about the quality of the communication, saying ’you have this scheme, it has this value to you, but the reason you have to pay a charge is because there is a set-up cost’, which is a payment to the adviser. You have to spell that ut to people so the concept of free money isn’t there.”
For Deane, the RDR is a process of learning the value of advice, even if it is a painful process.
“You have to say ’I am an employee in this scheme. I am paying a fee to have this scheme. If it is more than the employers contribution to me over the period of the year, then actually its not about whether its right or wrong, its about the quality of the communication of the value of the facility of the money to be able come to me, and that it is still worth something to me’. If you went off and set up a pension yourself you would still be paying charges and some adviser fees,” he says.
So what about the potential for bad headlines when individuals realise they are getting money deducted from their salary without having signed anything and find it is being paid to advisers?
“Then it is back to the first point of communication, before the deduction is made. If that isn’t explained to individual employees, don’t be surprised if you get negative PR. People understand that they are on their own when it comes to pension benefits.”
So what about schemes where persistency is poor? Deane says that is where the conversation between adviser and employer about whether fees or consultancy charges are the right route has to happen.
“Well that is where segmentation matters. If the worst people are taken into Nest, and they have the worst persistency, and the others are in the scheme, then its not necessarily the fact that you are taking 50 per cent of contributions. All you are asking is what is the economic model that is going to be sustainable for an adviser. For an adviser who has just done corporate business and not done individual advice, that may have to change. If the economic model doesn’t work they may have to charge less, and they may have to give individual advice to the people in that scheme. The reality is these things will develop over the next two to three years. But the idea no-one will value advice, I do not buy,” he says.
So does the industry have to shrug off the bad stories that will be written as part and parcel of the tough road to the new world?
“You don’t have to shrug it off but it is a consequence of the fact that people think this is free. The difficulty is that at the moment people think advice is free so that is part of that transition. But if you say I am paying a proportion of this scheme being set up, ultimately the employer has to think whether the employees are going to be happy with that level of charging, and that is between adviser and employer,” he says.
But for Deane, that does mean corporate advisers will have to do more to get paid in future, and that could mean more face to face advice.
“You may get into a space where corporate advisers advising the employer, and possibly restricted advisers, or full independent advisers coming in to give face to face advice. But that isn’t going to happen on January 1, 2013,” he says.” I see advisers saying ’Do you want me to provide financial advice at a slightly cheaper price because of the economies of scale’.
“So I am going in as an IFA and having six meetings with six scheme members. That is more efficient for IFAs. If RDR is going to work, there will be more interest in advice. But if they are not prepared to pay for advice I find it an interesting proposition that they are prepared to buy a product, because if they are to, they would be today,” he says, with corporate wrap rivals firmly in mind.
But he accepts the public is not going to accept paying for advice, whether as individuals or through their corporate pensions, overnight.
“There could be a disconnect in the market for a period of time. Take dentists. 25 years ago the concept of paying for your dentistry was alien.
Now for a generation of people coming through, paying is part of the rules of the game.
“I accept in the early years there will be a number of people who won’t want to pay for advice. But there will be a whole load of baby boomers who are going to come through who would not normally be captured by advisers. For corporate advisers it does beg the question how many individual advice opportunities are you passing by. Today people walk out the door with big pots needing advice and no-one asked if they wanted it,” says Deane.
Deane also sees potential conflicts between the motives of corporate wrap providers, and their advisers and employer partners.
“If you hear some of the big commission players talk about why group business is attractive to them, they say because they want to sell other things through the corporate space. But that is the same for the adviser. If you are selling one company’s products to a corporate client its not a massive step to ask why you need that adviser. Some advisers are nervous about the very strong brands that are being put out there because of the fear that they are going to be pushed aside once the provider has got these schemes,” he says.
“Corporate wraps sell product. They do not provide advice. The big assumption is that people will want to buy through these platforms. Actually if you go and talk to people, they aren’t saying they want to buy but don’t have a facility to do so. For many people getting a look at their whole financial picture is key. The bit that says I am going to provide lots of product through corporate wrap is a solution to a provider problem, not the individual,” he adds.
“There could be a disconnect in the market for a period of time. Take dentists. 25 years ago the concept of paying for your dentistry was alien. Now for a generation of people coming through, paying is part of the rules of the game”
But what about the idea of the trusted employer?
“That goes two ways. If that is the case then employers are taking some responsibility either implicitly or explicitly. And that undermines the role of the IFA. The key is advice, and that is the big thing in the market. We need to see these schemes not as an opportunity to shift product but as a way to provide advice more economically to the market,” says Deane.
Deane also sees auto-enrolment driving changing attitudes to saving but wants the government to do more to spell out the duties individuals must take on.
“The government has a big role to play in this this is a society problem, the impending problem of old age. We may even end in 30 years time, yes there is the grey vote but working age people may say ’enough is enough’ and could you end up with a higher rate of taxation for people in old age? I don’t think we have laid the problem out sufficiently.”
Going forward Deane sees success through provision of appropriate tools to enable advisers to take up the auto-enrolment opportunity and having default funds, lifestyling and communications, which Scottish Life has just revamped on its schemes.
These will be the factors Deane thinks will be the real differentiators going forward. “We think we are in a good position for the future,” says Deane. “We have not said commission will sell our proposition but have reserved our capital for what we see as the real opportunity going forward.”
CV - JOHN DEANE
Bath, ’convenient, as I work in Edinburgh and London’.
- Keen cyclist between May and September ’because I do a charity cycle ride with MoneySpinners every September. Then it goes in the garage till the next year.’
- Bath Rugby fan
- Chief executive, Scottish Life
- Joined the Royal London board in 2007, originally as IFA division chief
- Formerly worked at Old Mutual where he was corporate development director, playing a part in the acquisition of Skandia.
- In 2000 Deane formed Adeptain, an outsourcing company, which contracted with major life companies.
- Previously held positions wit Laurentian Life and Century Life.
- Is a Fellow of the Institute of Actuaries.
John Deane is married, with three children.