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Bread without margin

Last week, I looked at some of the issues facing the IFA community in

moving to the pricing structure allowed under the Government&#39s proposals

for stakeholder pensions. This will deliver quality financial services

products to consumers at a fraction of their current margins, even if some

product providers choose to circumvent the IFA in so doing.

Although I believe the more enlightened product providers will recognise

the value added by the IFA, there are certain issues raised by stakeholder

pricing that are difficult to ignore.

Essentially, stakeholder pensions and Isas prove it is possible to deliver

financial products at a fraction of the margins accepted by consumers in

the past. The IFA community is built around delivering services to those

who have the wherewithal to afford products priced considerably in excess

of the margins that the Government finds acceptable. How then, if we can

provide cheaper products to those with lesser incomes, can existing price

structures be justified to more affluent clients?

In practice, the lower margins delivered by stakeholder and similar

products will drive down acceptable margins within all products. Just as

electronic servicing facilities are the solution to helping the currently

financially disenfranchised, they represent the only way forward for the

high-net-worth market. The more discerning consumers will increasingly seek

out better value for money from those who provide them with their financial


Over the last year, I have given several warnings of the new competitors

IFAs will face. Many of these have now arrived and, over the next few

months, will be competing head to head with traditional advisers for their

key clients. Barely a week goes by without the announcement of new low-cost

financial services providers. E*Trade, Egg, First-e and many more are now

setting out their stalls, offering an increasingly complex range of

products to consumers. How can traditional IFA players react to these new


The answer is simple but will require close collaboration between product

providers and IFAs. In the last couple of months, I have had first-hand

involvement in the moves to deliver electronic business services for bond

products. This has been achieved by an unprecedented level of co-operation

between life offices, a small number of national IFAs and software

providers. If this new business initiative, previously reported in this

column, has proved one thing, it is that the IFA can still drive

distribution developments.

I must give due credit to the chief executives of the six life offices

originally invited to support this initiative – CGU, Legal & General,

Norwich Union, Prudential, Sun Life and Scottish Widows – for responding so

positively to the IFA call to action.

Also, on the IFA side, Peter Catt of Advizas, Nick Johnson of Hifal and

Keith Webb of Towry Law are doing a sterling job on the same project. All

this, of course, could not be achieved without the invaluable guidance and

facilitation being provided by Origo.

But before anyone gets too comfortable, the current effort is still not

enough. The present group is working towards delivery of electronic

business services in the bond area. I am already in conversation with

several life offices, IFAs and technology providers looking to develop

parallel projects in other product areas. In business volume terms, those

seeking to participate in these additional initiatives, currently covering

unit trusts, mortgages and pensions, will gain first-mover advantage, with

all that brings, and I applaud them for their vision.

However, this does not address the most essential part of the IFA process

– client servicing. You only have to look across the Atlantic to see the

level of service that all clients will expect in the near future. US

clients can look up the value of their holdings

24 hours a day, seven days a week. They can review the performance of

funds, look at alternatives and switch at their own convenience. This is

easy if you are carrying out the transaction via a single product provider.

These are just the services that many of the fund supermarkets will be

offering in the UK before Christmas.

You only have to look at the number of product providers moving to adopt

multi-fund links, along the lines of the Skandia model, to recognise the

number of life offices making contingent plans for a step-change in the

distribution model potentially driven by online trading.

Perhaps this is something the Office of Fair Trading had in mind when

drafting its recent report suggesting the desirability of multi-ties in the

managed fund area?

If IFAs cannot deliver similar facilities, but fully supporting the wide

range of product providers, we run the very real risk of the superior

service offered by IFAs appearing inferior to technologically more advanced

one-stop shops.

We desperately need to see similar resources as are being allocated to new

business devoted to client servicing. A number of big regional IFAs have a

desire to develop a service to meet such needs. Any other firms or life

offices with a similar interest should contact me so we can give this area

equal attention.


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