In the “dark days before regulation” there was an explosion of innovation in the sales and marketing of financial services.
I remember Standard Life stating it would never become a unit-linked office. IFAs did not officially exist. “Advisers” chose from a very small number of providers, which inclu-ded some of the most revered firms of accountants.
Companies were set up with new schemes to attract people who had never saved. Young entrepreneurs began such companies as Welfare Insurance and Property Growth.
This expansion of new businesses benefited the consumer by offering choice and forced older businesses to change their staid ideas. The UK financial services industry was the envy of the world.
Most economists agree that true competition fuels growth and is the only long-term solution to benefit the end-user. Why should the UK consumer and this industry accept the seemingly unstoppable trend of the reduction of choice due to consolidation?
For example, over the past 23 years, the number of pension fund providers has plummeted from over 300 to maybe a handful by the end of 2001.
In order to speculate about the future, it is important to understand the reasons for the changes currently causing our consumers to accept their fate.
This process has recently accelerated with the increased involvement of regulators and politicians creating an artificial environment that causes product providers to rush to seek partners with “deep pockets”.
Shall we end up with one company called, say, Standard Union run by the FSA and changing its name later (so that no risk is ever taken again) to Nanny Life?
We only need to look at the German market to perceive a land without competition. Lack of choice produces an arrogant business with poor performance and a lack of ideas.
There is, of course, a major benefit of extreme consolidation – if there are only a dozen major providers left, they are much easier to regulate.
Is it simply my imagination, or is the reduction of choice reflected by smaller financial supplements in our newspapers because there is nothing to write about?
Where does it leave the IFA? Many industry pundits have been predicting the demise of the IFA since the late 1980s and the maximum commission agreement. It was no coincidence that the number of registered firms and individuals crashed while tied agents flourished.
This process reversed and the IFA sector grew at the expense of direct salespeople when the MCA was swept away by competition.
The three factors driving consolidation in the IFA sector are commission change, regulatory pressures and the increasing sophistication of the better IFAs, who see that change brings opportunity.
There are considerable problems for the IFA due to the past fragmentation of the market caused by networks offering the Nirvana of being able to move from being recognised as a fully fledged professional IFA after a cursory training scheme.
The commercial factors of reducing commission, reducing providers, reducing choice of products and increasing costs of admin and regulation are currently very high priority for principals. Add in the time and costs of the endless reviews and this is a recipe for change.
The first barrier for most IFAs is overvaluing their business. Although they are usually good financial advisers, they have little or no experience of negotiation or valuing a business.
It is too easy to negotiate yourself out of a deal. Only the pragmatic will survive, perhaps leaving the others as employees of the institutions that trained them in the first place.
The second and fundamental barrier to survival is with the pressure on margins. IFAs look for partners with deep pockets but the partners may not be what we expect or consider desirable.
Could the final outcome – fewer product providers with deep pockets – be the true formation of multi-ties, which was, in reality, the same position in “the dark days before regulation”?