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Are buyers on a direct route?

Sam Smith reports on Scottish Life’s hard-hitting claims that some life offices are buying advice firms to turn them into quasi DFSs

Scottish Life has reignited the debate over the merits of insurance companies buying up distribution, saying it is “quietly amused” by insurers buying up adviser companies while at the same time affirming their commitment to the independent sector.

The company believes this is a move by some product providers to build new-style direct salesforces ahead of the retail distribution review.

It says: “We are quietly amused by the insurers who are buying up distribution and yet stating they are committed to the independent community. We are convinced they are positioning themselves for a new breed of DSF which they can dominate.”

Pi Financial Dixon Tim Sutcliffe chief executive says his firm would resist becoming owned by a product provider because he believes it would compromise its independence.

He says: “Distributors bought by product providers will at best become some form of multi-tie and at worst become a tied agent with an ‘open architecture’ platform where whichever provider we are talking about has a certain wrapper around their own range of funds and products and only offer access to a limited number of investment houses. The acid test is where does that leave the customer? The short answer is – nowhere.”

ScotLife also says the retail distribution review will inevitably make life tougher for mid-market IFAs. It believes that although this is not a bad thing for those wanting to “trade up” towards professional financial planner status, those that do not may be forced to become part of a “quasi-DSF” model.

Axa and Friends Provident, two insurance companies which have recently bought adviser firms, have argued against this stance, saying their respective purchases of Thinc and Sesame will stay 100 per cent independent.

Positive Solutions believes this is possible. It has been owned by Aegon for five years and is adamant that its IFA stance has never been compromised.

PosSol marketing manager Phil Harrison says: “It is absolutely not an issue for us and never has been. Aegon were interested in investing in us because we were a firm they were interested in and one that would deliver a good return on its investment. We employ a better than best rule to ensure the advisers’ independence is not compromised.”

PosSol says it did not even recommend Aegon products across the board, as they were not the best of the breed in some sectors.

Harrison says: “Whether we were owned by Aegon or another third party, it was about the shareholders looking for a return on their investment. They got a good price at the time and they had faith and that faith has been repaid by us giving them a good return on their investment.”

But Harrison says other firms being bought by insurers might be pressured to include the parent firm’s products on its multi-tie panel, for example.

Harrison says this is the type of investment that the regulator should be looking at. He says: “Some of these deals should probably have been investigated.”

Threesixty partner Phil Young says some adviser firms owned by product providers may even sub-consciously feel obliged not to recommend products from their parent in a bid to ensure they are not accused of bias.

Young says: “You tend to find within networks and the like that are owned by providers that the majority of advisers tend to go against that particular provider.

“I would expect that over the short term. Friends Provident might see a reduction in the amount of Sesame IFAs writing business through them. IFAs tend to be fiercely independent, so there is no reason for them to be influenced. They tend to be over-sensitive to it and end up over-compensating.”

Young says being fully owned by a provider is not something the firm has considered although it is part-owned by Standard Life.

He says: “There are different motivations to consider. Friends Provident buying Sesame may have been motivated by a purely investment perspective, as, say, Standard Life’s minority stake investment in Threesixty. On the other hand, some deals might have been motivated purely by trying to acquire assets under management.”

But Sutcliffe says: “Why are these firms buying up distribution chains if they do not think they can take money by turning organisations into direct distribution channels?”

“This is death by 1,000 cuts. They would never come clean and say that is what they are doing. But if they sell it off, change the compliance and adapt it so it becomes easier to so business with these firms, they can incentivise the advisers by different remuneration structures and change status. I think they will see their independence subtly and gradually eroded.”

Some advisers have other concerns, such as whether the insurance company buying distribution has sufficient knowledge of how the sector works to ensure the business is taken forward in the right direction.

Cavanagh chief executive Andrew Fay says: “I do not think their intention is to be a threat to advisers’ independence. The main point is whether they are encouraging the business they buy to develop in the right way.

“Will they have the right people in there to be able to deliver? Do they have enough understanding of the IFA market to be able to give that type of support?”

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