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A matter of life and dearth

Nucleus Financial Group chief executive David Ferguson argues that the life industry is facing a significant threat through a failure to strengthen its proposition. Yet he says insurers’ demise could boost good quality IFAs as value drifts through to the advisory sector

It has been a funny few months in the retail sector. After seeing the life industry descend into an even more confused state on how it should approach distribution, the retail distribution review has started to develop a framework around some of the emerging issues that are shaping the direction of the IFA sector.

Despite the different approaches of the life sector – buying IFAs, taking minority stakes in IFAs, investing in wrap and so on – there is a widespread acceptance that a significant share of the overall value currently residing in the manufacturing sector is gradually drifting toward the advisory sector and perhaps even back to the end client in the form of a lower-cost and higher-performing proposition.

We are beginning to witness a stronger understanding of how good quality IFA businesses should be valued and an increasing acceptance that not-very-good IFA businesses are actually worth not very much. That is how it should be, indisputably.

Alongside this, we have all the various initiatives aimed at increasing access to financial services for the mass market. While I do not wish to get into a debate about whether people with limited means should be investing in a pension or not, I cannot help think that all of this navel-gazing and discussion about distribution is overlooking one extremely salient point – the manufacturing efficiency of the life and pension sector.

For all the scrutiny of commission and transparency of advisers’ earnings, there has been a wall of silence on how the life sector aims to boost the attractiveness of its proposition and in doing so seriously reinvent its operational model so that it might deliver that proposition more cost-effectively.

We have seen stories recently suggesting that at least one major UK insurance group is currently running more than 500 product systems. Now, I am no technology expert but neither do I think I have to be one to make the suggestion that this may not be the most efficient way to run a business. Any business. The company in question has apparently embarked on a several-year project to rectify this situation but, given the sector’s ability to deliver on technology, do we really believe the timescales quoted and is anyone thinking hard enough about who is being forced to pay to fix this legacy problem?

In making these observations, I do have some sympathy in so far as the sector has been dealing with long-term products through times of great advancement in technology and significant changes in the regulatory environment. That said, I do not really see the banks suffering from the same crisis. There are far too few people in this sector who are driven by creating efficient processes and delivering an excellent level of customer service. There has always been far too much interest in generating the next new product that can drive yet more sales volumes rather than a focus on delivering on the products that were sold last week.

I recently attended an asset management conference in Dublin where, in a room of about 80, only two people highlighted operational matters as a key issue to be addressed by that sector as it endeavours to best prepare itself for the challenges of the next few years. And one of them was not working for an asset management group.

The life sector is in serious danger of missing the technology boat. Increasingly rapid growth in online Sipp and wrap propositions that deliver far stronger client experiences than the legacy packaged product environment we have been familiar with are a very real threat.

It is my judgement that the life sector is facing a serious erosion of value as massaffluent and high-net-worth clients elect to move their portfolios into a more modern online environment. Should the life industry fail to improve on its dismal service levels, this erosion in value will be accelerated and may ultimately be more significant.

Perhaps, ironically, this also stimulates savings in the advisory market as not only does the IFA become more efficient through reduced back-office costs associated with chasing insurers for valuations and such like but the valuation basis for that sector also changes as the client/adviser relationship is strengthened.

There is a further unanswered question. In the absence of a requirement to provide capital to fund the IFA sector, just what is the proposition of the life sector?

We work in one of the very few remaining industries that is sponsored by Government funding to drive sales, yet all the industry can do is complain about the regulations surrounding us. Where is the creativity in delivering to the needs (and, more, pressingly wants) of the mass-market audience?

In all this, the winners will be those that are able to deliver the best, most fairly priced and highly performing products and propositions.

Good quality IFAs are currently sitting with the greatest opportunity of their lives. The value drift is only speeding up and the big question is whether the life and pension sector can make any meaningful response.


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