For the last 10 years, the epithet given to a growing band of individual wealth advisers was ‘new model advisers’. The characteristic distinguishing these advisers was that they charged fees for providing their clients with a regular service, as opposed to earning commission for a one-off product sale.
Over the same period, there’s been some innovation in business models for corporate advisers but we haven’t seen a revolution on the same scale. Given the significance of the current regulatory change, that may be about to change.
The first driver will be the unprecedented surge of demand in the workplace pensions market due to automatic enrolment. Secondly, the recent prohibition of consultancy charging means that the best option advisers have for raising revenue is charging fees to employers.
Looking at the demand side first of all, every employer has to comply with a detailed set of regulations. Some employers will choose to self-serve. At Nest we’ve already seen some a number of employers successfully set up and run their own schemes by using our website without assistance. However, many employers won’t have the resources or inclination to do it themselves. This second group of employers is looking for someone to help them comply.
The traditional advisory model may not be the best fit for this emerging need. The key traditional services have revolved around scheme design (contribution rates, fund design), provider selection and employee engagement. In the past, when workplace pensions were voluntary, this was exactly the type of service paternalistic employers wanted.
Now, in an automatic enrolment world, many employers are focused primarily on complying with their new duties and are less interested in traditional advisory services. What they do want is someone with pension knowledge who can help them meet their duties at low cost.
As a result, the new intermediary models are focusing on those business processes that are critical for compliance: ensuring the employer’s data is clean, assessing the workforce for eligibility, enabling communication between payroll systems and pension scheme, worker communications and managing initial opt outs. Once the scheme has been implemented, the service extends to supporting the ongoing administration of payments, enrolments, opt-outs and re-enrolments.
While demand for this type of support is high, it’s imperative that the intermediary models keep fees competitive. Employers tend to expect lower hourly rates for administrative services and, in any case, they may be tempted to run the scheme themselves if they’re quoted a high fee.
It’s essential, therefore, that an intermediary operating in this space must be lean itself, focusing on only those parts of the process an employer genuinely values and minimising any extraneous part of the process.
For example, let’s look at the changing significance of provider selection. Traditional models have often placed a lot of emphasis on the process of selecting the provider who best matches each employer’s needs. This could involve comparing communications, administration, pricing and investment proposition, sometimes using a ‘beauty parade’ to manage the process.
In the new market place the employer who is concentrating on compliance is less likely to pay to find the best provider for their precise needs. Instead, knowing they have a provider that’s trustworthy, one that offers value for money and is easy to deal with is often ‘good enough’.
As a result, the lean adviser will want to be sure they can serve all of their clients while minimising their search and administration costs. A small panel approach offers a double advantage: the time spent selecting the provider for each client is small and the intermediary needs administrative links with fewer providers, which reduces their own costs.
Many employers will continue to seek out the more established advisory service but the intermediary market is very diverse and I’m sure we’re now starting to see the arrival of the new model corporate adviser.
John Taylor is managing director of customer and proposition at Nest