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Commission impossible?

Scottish Amicable&#39s decision to effectively pull out of the stakeholder

race by shelving initial commission on regular-premium business took rivals

and IFAs by surprise.

ScotAm had a well founded reputation for aggressively chasing market share

through IFAs by paying among the highest rates going as well as making much

of its technology investment and desire to corner a fifth of the new group

pension market.

NPI UK sales manager David Tildesley says: “We were surprised by the move.

They were very highly competitive on commission.”

However, looking to Scot-Am&#39s official statement will not tell you much

about the motivation behind the move. Headed “Prudential to concentrate its

IFA focus”, the statement cryptically says the Pru “intends to focus its

intermediated business on a series of core markets in which it can add

value for customers, IFAs and shareholders”.

The move will see ScotAm “working even more closely with advisers in the

market segments that offer the greatest prospect of profitability for both


Seemingly great news, but below this marketing spiel is the deadly blow to

IFAs that initial commission is to be withdrawn for reasons of

unsustainable profitability.

That the stakeholder market would be tough and that profits could only

come in the long term is hardly fresh news. Ever since the 1 per cent price

cap was confirmed, experts have been queuing up to say the market would

permit onlythe strongest to survive.

Shedding some light on other reasons, Misys IFA Services head of marketing

Andrew Bedford says: “Pro-duct providers have got to know what market they

want to be in. Those who want to be major in stakeholder have to have IFAs

with them, because who else is going to market it?

“ScotAm are bowing out gracefully and letting the others get on with it.

Others will keep paying commission and will lead the market and take

biggest share.”

Arguably, the reason ScotAm will not pay IFAs initial commission to sell

its pension products is because, as part of the mighty Pru, it has a choice

of distribution channels.

Despite the likes of Standard Life, Norwich Union and Scottish Equitable

vowing to maintain initial commission, some advisers see ScotAm&#39s move as a

wake-up call for the rest of the industry.

Richard Jacobs Pensions & Trustee Services director Richard Jacobs says:

“Initial commission will still have a little while to run yet while the big

boys are still after their market share. Most are writing designation

business so they will wait until after the October deadline and before

compulsion comes in and then drop it. “An end to initial commission is

decades overdue. I cannot believe it is still being paid. This industry

will always be tarnished until we move away from it.”

IFA Chartwell associate director Patrick Connolly says: “ScotAm&#39s move may

be just the first step. I would not be surprised if others follow, even if

they just reduce initial commission instead of eradicating it altogether.

There is no scope for initial commission in 1 per cent.”

Carrington Investments Consultants senior consultant Anton Taylor says:

“The question is can IFAs stay in business during the change over to

renewal-only? It will come as a shock and some are bound to go to the wall.”

What kind of provider will win the endurance test of stakeholder survival?

Aegon spokesman Scott White says: “IFAs are our business channel so we

align ourselves with their needs. This does throw up issues about a

company&#39s ability to meet their market requirements. They are making

decisions to put up or shut up and there will be ones which shut up. The

overall exercise is to make sure that your business is aligned with the

market that you want.”

But no commitment to paying initial commission is sacred and IFAs should

start making contingency plans.

Friends Provident head of stakeholder strategy Paul Stanbridge says: “From

a profitability point of view, our preference is nilor fund-based

commission business. The decline in commission will be also be accelerated

by the top providers.”

Friends adds that IFAs have a choice – to use internet technology to make

processing of business more streamlined and cost-effective or to face an

accelerated drop in initial commission.

IFAs see the issue much less about technology and more about market share.

Hargreaves Lansdown retirement planning manager Danny Cox: “It was fairly

inevitable that current levels of commission are not sustainable and will

continue to reduce once companies have met their desired volumes in the

current scramble for share. ScotAm, coupled with the Sandler review, is

just the start of reducing levels.”

IFAs should also be wary of promises to maintain initial commission as

each life office watches to see who will crack first on commission levels.

Tildesley says: “Of course, if everyone else pulled out we would take a

look at our stance. But currently we underwrite every scheme in terms of

the commission we offer, depending on the quality of the scheme.”

Given the assorted pressures on initial commission,it would be prudent for

IFAs still relying predominantly on initial commission to consider upping

their reliance on fees as well as select their preferred stakeholder

providers with extra care.


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