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Commentary The big change

Since the birth of financial services, the control of product manufacture and distribution has been in the hands of insurance companies.

This system has been successful but it is unusual in most industries for the product manufacturer to control both manufacture and distribution of its products and this is where the metamorphosis in financial service distribution is happening.

The economic and social benefit to our society and the role of the adviser is not always readily recognised. The adviser has been instrumental in creating this industry over the last 150 years.

Without the adviser, there would be no product manufacturer, yet he has no influence on design or manufacture. Until recently, IFA firms have been small, fragmented businesses which cannot exert collective influence.

Since the Financial Services Act, we have seen the birth and growth of big distributors that have scale but insufficient influence. This will end with the removal of polarisation, with the natural relationship between manufacturer and distributor being enhanced.

The concept of better than best cannot be achieved and restricts the distributor, that is the adviser, from product influence. Depolarisation will create an industry split into an IFA arena and a multi-tie arena.

The current industry structure is expensive as manufacturers waste money on products that are not tailored. This can be avoided by guaranteeing premium flow to a manufacturer. Real savings for the consumer can be made through competitive pressures rather than imposed price caps.

Within a multi-tie environment, the distributor will be able to work more easily with manufacturers to design products which we know consumers will want to buy. Entering into agreements with manufacturers will mean costeffective distribution, creating savings for manufacturers which can be divided between client, adviser and manufacturer.

The future of the market, holds two possible scenarios. The first is that, over time, multi-tie products will differ from those sold by IFAs. The guarantees of business from multi-tie distributors will enable cost savings for providers and enable specific product design for the consumer. In this scenario, the IFA will eventually have fewer competitive and outdated products because IFA products will not be developed by providers due to lack of business flow.

The second is that it is generally accepted that a supermarket provides a one-stop shop with more convenience, choice, quality and price. It is reasonable to consider it could be the same for a big financial supermarket. Does the consumer want it? A pointer may be that Tesco became the second-biggest motor insurance distributor in the UK in less than 12 months.

The industry has under 4,000 IFAs firms compared with 6,000 a few years ago. Consolidation is inevitable. Around 80 per cent of business is conducted by the 100 biggest firms. Around 70 per cent of those firms are privately owned by individuals over the age of 50. In five to 10 years, ownership will change due to death, retirement or sale. Generally, firms tend to sell to bigger firms. It is reasonable to assume that within a decade 80 per cent of all business will be conducted by fewer than 30 firms. If this is true it is counter-intuitive to believe that an industry can sustain can sustain 3,900 firms that conduct 20 per cent of the business where a vast number of those firms are also owned by individuals who are over 50.

Each individual practice will soon have to decide whether to be a whole-of-market IFA, multi-tie distributor or IFA with a limited panel or a combination of all three.

We are in an age of great change which cannot be stopped. We believe it will be to the ultimate advantage of clients and advisers. Only practices that are big enough and properly structured can deliver a comprehensive service on a national scale.


The industry is faced with a significant lack of public confidence whenever the subject of commission payment comes up.

We see this most clearly in comments made by the Treasury select committee, the consumer lobby, the media and the long-term struggle by the Government and regulatory policymakers with the issue.

In the new FSA menu approach, the principal useful feature of commission to the consumer – that advice can be costed into the product – must be emphasised if we are to provide the service which consumers want. In the vast majority of cases, they do not want to incur the direct cost of an up-front fee to the adviser.

Should we change the terminology? If commission is a sensitive term, why not call it a fee costed into the product?

In this formulation of fee (or advice charge), the consumer would have no up-front costs unless they chose to pay the IFA directly. If the menu was converted into a list of the adviser&#39s charges, with the very clear choice to either pay the adviser or leave it to the adviser directly to cost the amount into the product, then it is possible that the sensitivity to the consumer could be lessened. Such an approach could be applied in both the independent and non-independent sectors, as proposed by the FSA.

A key point is that reputational damage to the sector of maintaining the term commission could be redressed. The alternative model would probably be seen as more professional. This fits very well with the LIA forward plan to create a professional grouping within the advice sector, moving away from retail distribution to professional service.

Whatever we do about the commission issue, the menu is far too complex as currently drafted. One option that the LIA recently suggested to the FSA would be to carry out the commission disclosure later in the advice process. This would reduce the complexity of the disclosure which, in the FSA version, ranges over most conceivable options in 12 product groups.

The FSA plan to use a menu to cause clients to shop around with a full list of cost options flies in the face of commercial reality and is likely to increase reluctance to using adviser services.

John Ellis is director of public affairs at the LIA

Kevin Duffy on mortgages

Exactly 12 months on from David Beckham&#39s Old Trafford divorce, we have a story which features no less intrigue and uncertainty. I refer, of course, to Bradford & Bingley&#39s Fergie-like intentions to “remove complexity ” from its group operations.

Doubtless, certain Charcol diehards might accuse me of dancing on the firm&#39s grave. Bunkum. As a former Charcol employee, my perspective is relevant.

The tiny matter of a B&B share certificate sitting in the family biscuit tin grants me the right to rant like any other disenchanted shareholder so in order of what, why, when and who, this is my tuppenceworth. What&#39s it all about? Well, clearly, profitability.

Through the original craft of Messrs Garfield and Darby and more latterly Avrilli and Boulger, Charcol became and indeed still is a premier brand. It is to the intermediary market what, say, the Royal Academy of Dramatic Art is to a career in drama – the leading proving ground in the business.

Regardless of that, high operational gearing and identified potential cost savings of £40m underperform its brand magnitude. Profit margins at Charcol have always been closely guarded. Now we know why.

This simplistically answers the “why” question. But two other influencing factors are at work here. First, there is the law of subsidiary comparison. Set against the often understated performance of the true jewel in the B&B crown – Mortgage Express – it is clear that despite doubling in size in the last few years, dividend growth has not been commensurate.

Second, there is the cost of marzipan, the term I use to describe that middle-management layer of a cake which is neither its fruity core of fee-earners nor its executive. Charcol has enough marzipan to bake a Battenberg cake as long as its Great Queen Street headquarters.

The “when” aspect covers two timelines. Precisely when did the company start to lose its cache status and when will a sale crystallize?

Many feel the Warburg Pincus deal in 1998 was a turning point. This quite rightly made millionaires of the company&#39s architects but brought with it mega-bureaucracy as well as mega-bucks. Any new deal may take several months to conclude, not least because of caveat emptor. An empirical valuation is tricky to arrive at. Charcol&#39s value is tripartite – goodwill, product and distribution and its consultants. The first two are pretty much fixed assets nowadays. But the third is a floating asset which for any brokerage can never be truly securitised.

Which brings us ultimately back to “who”. I am no Roman Abramovich but if so I would be beating a path to Mr Crawshaw&#39s door. Talk of a management buyout is inevitable but this would involve selected management risking their securely won fortunes at a time when investment banks are being spooked by both Opec and a media intent on talking us all into economic meltdown.

Equally, I simply cannot see a mainstream bancassurer improving margins without doing so at the expense of consultant retention and the continued erosion of Charcol&#39s sovereignty. Forget Hell&#39s Kitchen – this is going to be the summer&#39s most captivating viewing.

Kevin Duffy is managing director of Hamptons International Mortgages


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