View more on these topics

Driving down costs

Most of the post-Sandler debate on the UK mutual fund industry has focused on increased transparency, price caps and the issues raised by a new breed of low-cost, no-advice products. But I have been struck by the lack of discussion on what all this means for the future cost base of the industry.

My perception is that much of the industry has yet to move on from the short-term worries of: “How is this going to work?” to the longer-term issues of: “If this works, what are the implications and how are we going to manage them?” The Sandler review was clear about its aim to increase competitive intensity and achieve greater price competition. The implication is that the industry should be preparing itself for a world where revenues will be significantly lower. Unless participants have a game plan that will reduce their costs substantially (30 per cent is a realistic starting point), then Micawber&#39s law is going to catch up with them.

Sandler suggested there are lessons to be drawn from the motor industry because its products have a high level of transparency. Resulting pressures on quality and revenue have transformed the end product and put huge pressures on revenues, as examination of the latest figures from Ford will show. The result is that the industry has had to become highly sophisticated about its cost management to balance the books and many companies which have failed to make the necessary changes have disappeared.

It is instructive to look at what separated the winners and losers in the motor industry. One important area of cost control was and remains the procurement of components. The less sophisticated approach, sometimes associated with the old British Leyland, was to seek quotes for components and buy the cheapest. This led to quality problems, significant expense and frustration for owners of the vehicles. As most of their vehicles used different components, orders were relatively small and this limited the cost reductions achieved.

The response, which was to place bigger orders less frequently, did achieve price reductions. But the increasing stockpile of components required more storage space and represented a more attractive target for thieving. Worse still, model changes would then require scrapping large stocks of components. The result was that the initiative was not achieving the sort of impact on the bottom line that management needed to secure the company&#39s future.

If we contrast this with the sophistication of one of the survivors, General Motors, some things are apparent. First, it recognised that big orders secure big discounts. This is achieved by insisting at the design stage that different models share components as much as possible. Second, strict requirements are imposed on component performance, with failure linked to financial penalties and non-renewal of orders. Finally, the supplier is required to make deliveries at the same time as the components are needed so that stocks at the assembly point are minimised. All this is driven by a focus on end quality and overall costs rather than cost per item.

In the mutual fund industry, our key area of cost is not in the buying of components but in areas such as data processing. The British Leylands of our industry are focused on automation of the processes and can point to significant progress. But many chief executives have become increasingly concerned at the lack of obvious impact on the bottom line and those concerns are exacerbated by the reluctance of many of those involved to carry out rigorous post-audits.

Where are the future General Motors of our industry? The contenders have recognised the potential value of automation but have moved on to recognise that each of the many times that data is taken from one computer system and re-entered by hand into another, extra costs and errors arise. Furthermore, every new computer system means not only initial costs but also the substantial expense of maintenance.

To avoid these factors negating potential benefits, the focus is on designing new products to fit within the parameters of existing systems and on eliminating the amount of data that has to be rekeyed over the life cycle of a mutual fund investment.

What this has revealed is that one of the industry black spots relates to data flows from intermediaries to providers and back again, where automation is either non-existent or non-standard.

How can we progress along this strategically critical path? Chief executives must recognise that change will be driven by a comprehensive redesign of the data process flows, not only within their business but also to and from customers. Tools such as EMX need to be seen as a part of this process and not as something that can be bolted on. Installing technology that is not integrated into the data process flow will increase instead of save costs.

Redesign of data process flows requires companies to identify and recruit people with the mindset and experience to do this effectively. They need to integrate these skills with the existing knowledge and skills within their company.

Experience from other parts of the financial services sector shows this is not cheap and it takes time and significant amounts of top management attention to deliver results. It would be a mistake to assume all this can be left until the heat is on. Those who have already started are building themselves an advantage.


Treasury publishes long awaited Sandler consultation

The Treasury has published its long awaited consultation on the make-up of the Sandler suite of products, setting out the specifications for the products. The suite will include an equity based product, a with-profits product and a pensions product although the Treasury says there is a case for including other products within the suite. The […]

Scale tips balance

It is hard to think of any document last year that stimulated more opposition from the IFA community than CP121. A year has passed and a great deal of good work has been carried out, especially by Paul Smee and his colleagues at Aifa, and finally the FSA has come up with proposals on how […]

Savills calls on mainstream lenders to cut rates

National mortgage broker Savills Private Finance is calling on mainstream lenders to cut their variable rates following today&#39s announcement that the Bank of England is reducing rates to 3.75 per cent from 4 per cent. But Savills says fixed rates are unlikely to fall immediately.Associate director Simon Jones says: “The rate cut has not come […]

Industry in talks to set up IFA-only PI insurer

Aifa is in talks with the ABI, the FSA, product providers and professional indemnity underwriters about the possibility of forming a captive PI insurer selling cover exclusively to IFAs. In CP169, Professional Indemnity Insurance for Personal Investment Firms, published this week, the FSA outlines the possibility of a mutually run scheme to cover IFAs&#39PI needs […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm