Autif's prediction that the days of the discount broker are numbered has been described as premature by some commentators.
But the statement served well as a reminder that the future of much of the financial services industry is shrouded in uncertainty as the Treasury and FSA push ahead with regulatory reform.
Nevertheless, from a pricing perspective, Autif's fore-cast on discount brokers is compelling.
Autif is predicting that a combination of the FSA's disclosure agenda and depolarisation will eliminate the pricing anomaly which has been at the crux of discount broker business.
Autif communications dir-ector Anne McMeehan says: “Currently, there is an anomaly which means a discount broker can sell a product to a client cheaper than they can buy it from the provider. But if management companies in the future have all commission structures shown outside the price, a discount broker will not be able to sell funds any cheaper.”
Fee-based IFAs are calling for providers to separate commission from products and the FSA's disclosure report is expected to look closely at the practicalities of this suggestion. This, topped with a multi-tied marketplace which would allow providers to work hand in hand to secure business, may well spell trouble for discounters.
The argument from the discounter camp, however, is that their proposition is not only about low prices. Most discounters offer portfolio consolidation services as well as research tools while the bigger operations can provide much greater resources of information. In some cases, there is even a degree of advice on offer as part of the discount package.
Discount broker HCF Partnership partner Richard Cra-ven says: “A discounter is not, as the name implies, just giving discounts. If you look at some of the consolidation and research tools which discounters offer, you just do not see that elsewhere.”
Craven says he is adamant that discount brokers will be able to survive any further squeeze on their margins brought about by depolarisation or disclosure. He says: “We are used to existing on low margins. It is the rest of the industry which is going to have the shake-up.”
While many see direct fund supermarkets such as Egg and Fidelity as the biggest threats to discount brokers, Craven believes discounters have provided the bulk of business to supermarkets.
Fidelity offers a third-party back-office facility but Egg does not offer the service.
Although supermarkets already theoretically offer direct clients the opportunity to transact at a discount and consolidate online, discount brokers say they can offer added value that the impersonal supermarket cannot.
Furthermore, even if a supermarket or provider can provide funds cheaply, they will still have a limited selection. As long as discounters retain their independence, they will have the advantage of being able to offer every fund on the market while almost all other non-advice channels will be multi-tied.
Fidelity marketing director David Cowdell believes discounters will have to distinguish themselves by offering more advice. He says: “If depolarisation comes in, as it is currently envisaged, it is going to stimulate competition. But those which can combine advice with full competitive pricing will still be valuable.”
Another factor which may ensure the survival of discounters is that, at the moment at least, providers seem relatively unenthusiastic about the prospect of competing with them. For most product providers, discounters provide a major part of their annual sales and have a strong established client list.
The fact that a change in commission structures will give fund managers the chance to go head to head with discounters for distribution does not mean they will.
Old Mutual Fund Managers head of marketing Ian Pascal says: “Our job is fund management. If someone can reach the end consumer more effectively than we can, it makes sense that you use their expertise. It makes much more sense than us setting up a huge direct-mail operation although some of the bigger providers may be happy to go down that route.”
There is a strong feeling among the fund management industry that the Treasury has not necessarily thought out the full implications of depolarisation and that the FSA has had its hands tied over the issue.
However, the release of the FSA's paper on disclosure later this year may be a good opportunity for the regulator to start to introduce some clarity into the future of the financial services.
While depolarisation and disclosure may not mean the death of the discount broker or the extinction of the smaller IFA, there is a likelihood that several businesses will suffer at the hands of the changes.
By clearing up some of the confusion now, these businesses can at least prepare for what is to come.
Bates Investment head of research James Dalby says: “I can see the concerns but I think that it is still a bit early to say what will happen. But I think discount brokers and IFAs will survive in whatever form they have to.”