Scottish Amicable's 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
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's 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IFAs that initial commission is to be withdrawn for reasons of
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
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's 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's 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's 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.