Welcome dear reader to the Editor’s column – Money Marketing’s first foray into the online commenting world.
The column was originally going to provide some explanations and pose some questions about the retail market, how it was changing, who was making the money, who was beating up whom on margins and where advisers and their clients fitted into all this. Perhaps later in the year. But that was before the dreaded Retail Distribution Review.
Unfortunately this threatens to change all the rules and means the Money Marketing bullshitometer has gone off the scale. Some people are behaving like the shysters they claim to be trying to stop. But others in adviser firms and provider businesses and perhaps even the odd regulator have the consumer interest genuinely at heart even if they are genuinely wrong. It is not their aims nor indeed all their arguments that MM thinks are wrong. Some of them have been readers for years and we value their views. But it is the method and the hidden agenda of the RDR itself where we find fault. We are also glad that at least one other trade paper has finally seen the light and come out against much of it. Hopefully others will follow. It is too important to let petty publishing rivalries affect things. But what I will try to do in this column in the next few weeks is pose some questions and maybe cause some pause for thought as the RDR juggernaut careers forward.
Dealing with the supposed RDR’s winners – the life offices – might I suggest that some may end up losers.
We know why they are in a flap. Insurers were suffering acute pain from generously priced commission terms and switching – a bad thing for insurers and a good thing for consumers and from churning – a bad thing for insurers and a bad thing for consumers.
Ned Cazalet told them they were destroying value. Their persistency calculations – in this instance this means how long the insurer keeps the money – not how long someone pays into a particular tax wrapper or pension – were all over the shop and they were losing money – even if shareholders hadn’t noticed.
So here is the conspiracy view of what they did about it. IFAs were destroying value for insurers. Life Cos didn’t think they could afford to deal with them anymore and the regulator hated advisers anyway. So they pushed at the open doors at the Treasury and the FSA and asked for a solution – while muttering darkly about moving overseas and shutting down half of Norwich, York, Edinburgh, Dorking and Colchester. The solution in brutal terms is to club IFAs to death with exams and capital adequacy, allow a tiny minority of financial planners and force everyone else into “primary” multi-ties.
This requires assuring the FSA that commission based sales can be run under lighter regulation with no misselling or – heaven forbid if there was – prompt payment of fines without complaint. The prize is much more control over distribution.
This would see bank based multi-ties or indeed tightly controlled provider owned and adviser based multi-ties which wouldn’t switch/churn or at least not much.
In this world, the life offices could continue to fund foreign adventures and big rebrands off of the squillions stuck in their back books. The money wouldn’t shift – it would persist – harsher critics might say stagnate but that is another argument. Business volumes would be guaranteed with only a few firms per “multi-tie” up while new entrants wouldn’t have a prayer.
And all this pushed by the ABI – an organisation dominated by big insurers – and indeed the banks – that own half of them anyway.
The result – instant IFA hell – instant life office nirvana and happy shareholders too.
Maybe it didn’t happen quite that way. But the insurers clearly did ask for something pretty radical and got it, complete with FSA threats to abolish general financial advisers – the category covering most advisers.
But this life office nirvana doesn’t quite stack up. There may be a rationale say for Norwich Union to agree with the plans given its size. It can direct market, has bank tie ups and it doesn’t lose that back book. It also won’t get constant hell from advisers over its service if IFAs don’t exist anymore.
L&G is probably well placed too, but for reasons mostly to do with its stable charging structure, good technology and strong distribution links. It should be a winner provided longevity risk doesn’t come and bite it too hard on its annuity flank.
CleriMed has Halifax. Widows has Lloyds. Yes I know it’s the other way around but we’re talking distribution.
Axa should be ok if the boys in Bordeaux decide it is worth their while playing ball. Besides Thinc, they also have in Mike Kellard and Winterthur the best example of how to transform an old style endowment provider beset with admin problems into a modernised, profitable company.
But Standard, Aegon and Royal London’s marketing division Scottish Life, even Prudential and of course Skandia – what is in it for them?
If the centre ground of advisers collapses the market will be left vying to get on bank multi-ties, and primary adviser panels owned by rivals.
How crunching are those bank negotiations in this controlled distribution world? They will want more than a pound of flesh.
Standard’s strongest card has been IFA relationships. What if there aren’t any? Scottish Life helped pioneer a form of Customer Agreed Remuneration but talk to ten different organisations and you get ten different definitions. What definition applies and is Scot Life big enough to cut it in this new order?
Aegon is a big IFA owner. Yet it is unclear if it has made any money from them and can it adapt those firms without massive walkouts? What are those bank links worth?
Meanwhile Friends’ plans for Sesame must make interesting reading – if anyone’s got the document please drop us a line. But do they support them as General Financial Advisers, get them qualified to the nines as Personal Financial Planners or cajole them into primary advice?
The deal probably made sense as a strategic each way bet but will the regulator spoil the party?
Pru is concentrating on innovative manufacturing such as its protection joint venture – it has good long term performance and is one of only a few remaining justifications for with profits. But it has fought shy of distribution and could get frozen out.
Skandia is banking on raised adviser standards working for it and hopes for a prosperous, increasingly qualified middle ground but what if the middle is abolished by a petulant regulator?
And that is the second massive risk alongside the changing market risk. Let’s call it FSA risk. The regulator has just held a massive review and then picked the bits that fitted its prejudices for its discussion paper.
It might stamp out IFAs. Then it might not make being a primary adviser all that attractive either. It can turn on banks too particularly if the consumer lobby screams blue murder on suitability and the return of DSFs. (The more screaming on this the better in my view.)
The big insurers may cope with change, they can market very well, and even advertise on television and they have access to capital. But medium sized life offices may be squeezed. Advisers who do make the top tier may never want to deal with a life office again as long as they live. Fund managers can go straight to banks anyway. And won’t some big distribution group or indeed fund manager/distributor like Fidelity continue to encourage switching where it is genuine?
Those life office and IFA chiefs who got embroiled on the various FSA committees might ask what influence they have had apart from getting a heads up on the detail.
In the case of the RDR it might have been a better tactic for some of them to be outside the tent pissing in, if you can forgive the reinterpretation of President Lyndon B Johnson famous quote about J Edgar Hoover.
Of course I haven’t got the numbers nor have I the vast budget to pay consultants’ fees for their advice. But have the insurers got their calculations correct on how to profit from these new untested channels with primary advice in particular not much more than twinkle in the FSA’s eye.
These life office tactics seem remarkably risky. I recall the story of an Irish election in the 1970s where the Minister for Local Government James Tully redrew the electoral boundaries in the hope of his party retaining power. He got it wrong and helped return the opposition with the biggest majority in the state’s history.
Rather than Gerrymander – the term Tullymander was born. I just can’t help wondering if the life offices haven’t committed the lobbying equivalent of a Tullymander over the RDR.