Over the last 20 years, firms have sought the most prof itable and sustainable busin ess models. The success of some, such as Harg reaves Lansdown and St James’s Place Capital, and the success of the fund manage ment sector, has demonstrated a lesson. Those who control the assets reap the rewards.
A 2 per cent charge (as a broad average cost), does not go far between advisers, platforms, life companies and fund managers, so the scale of the assets becomes crucial.
Significant effort is expended to expand share of the charge by fractions of a per cent.
Into this extremely febrile mix, the FSA has launched a depth charge through the RDR. By declaring an aversion to rebates, the FSA suddenlyplaced up to 0.75 per cent of the total 2 per cent charge up for grabs. Conservatively, this is at least £1bn of revenue during the next decade.
It has become of signal importance in retail financial services whether you pay rebates or you receive them.
The prize is in your grasp if you pay them but if you sit on the other side, your business model is under threat.
This is a position of threat to advisers, who are almost entirely receivers but it is also a significant challenge to life companies.
There are broadly two methods of including assets in the wrappers they provide.
One method is to purchase the underlying retail share class and receive a rebate, the other is to purchase the institutional share class, wrap it in a lifefund with a new charging layer, and pay the rebatesyourself. What we are witnessing in the market right now is examples by several life offices of the following:
● Declining to add additional funds to core ranges unless they are managed by their own fund management arms
● Where they are adding funds, creating preferred supplier lists with exotic names such as “The Matrix” or “G12” for example. These restrict the fund firms the life company promotes to a very small number, for which the life companies now demand “marketing allowances” rather than enhanced rebates
● Paying enhanced commission if their own life funds are used on current product ranges
● Setting precedents for the removal of trail on legacy clients by closing IFA agencies
● Lobbying the FSA in opposition to adviser firms who have tried to establish their own fund ranges
● Offering model portfolios populated entirely by their own “wrapped” life funds There is a strategic drive to re-establish life companies at the centre of the asset-gathering industry and to dramatically enhance their margins, primarily at the expense of advisers, although potentially also at the expense of fund managers.
Advisers should recognise the danger of being marginalised while life companies and fund management firms reap extraordinary rewards from the assets gathered by advisers. Advisory firms need to change this dynamic or face a bleak future.
Ronan Kearney is managing director at Allium Capital