Fund firms have radically changed the way they advertise in response to lower investor confidence and tough new rules restricting the use of past performance in financial promotions.
Many groups have rejigged their budgets, often reallocating the bulk of their resources to brand-building ads, while others have drastically slashed their spending.
This means that direct business is going to come under increasing pressure as groups cut their losses with certain types of business, particularly Isas. In 2000, for instance, groups collectively spent £37.9m on Isa ads in the national press but last year this figure had plunged to £6.9m, a drop of 80 per cent. Several reasons lie behind this but the main driver was the pessimism that surrounded the 2003 Isa season.
Although some discount brokers have seen rising sales, many suffered a sharp drop-off as Isa ads faded away. Chelsea Financial Services managing director Darius McDermott says: “Groups are not stupid. They are not going to waste money advertising when they think they will not get sales on the back of it. If people have stopped buying, it is because of bad markets rather than falling ad spends.”
But there is a danger that Isa sales will stay sluggish if groups continue with the current levels of their direct ad budgets. Jupiter decided early last year to reduce its consumer ad spend by roughly a third, cutting its Isa budget by 60 per cent as it sought to bolster its brand with a series of name-awareness ads. Describing this as “a good call”, it is unlikely to reverse its decision, particularly as, in common with many other big groups, it does not want to attract Isa-type business.
Joint managing director Gordon Davidson says: “Many people who bought Isas at the tail end of the bear market believe the product, not the underlying assets, is flawed. But we do not want large numbers of small investors anyway. It is simply too expensive.”
How are groups allocating budgets that until recently were focused on attracting new direct Isa business? In the main, they are redirecting them to brand-focused advertising, given the restrictions that have been placed on the use of past performance in ads.
Even groups with drastically reduced Isa ad spends have increased their overall budgets as they try to keep their brands as visible as possible without the usual marketing tools. Jupiter, for example, spent £2.6m on all media advertising in the first quarter of 2003 but spent £2.8m in the same period this year while Invesco Perpetual increased its spend from £2.3m to £3.2m.
New Star, Isis, Gartmore and Artemis also increased their ad budgets by varying degrees but Fidelity was the biggest spender, hiking its budget from £2.7m in Q1 2003 to £4.2m in Q1 this year. Associate director for corporate communications Jo Roddan says: “We have increased it because of better market conditions and the fact that we have so many distribution channels to support. We have more in the pot to spend.”
Advertising remains essential then but how will shifting strategies affect distribution? New Star believes consumer ads and sales have dropped off so substantially that a new paradigm has emerged, under which direct sales will become an increasing irrelevance. Marketing director Rob Page says: “Does this mean the end of the retail investor? Far from it. We believe that the retail investor market is recovering strongly. Retail fund flows will continue to rise but they will go to groups via a different route. Supermarkets and life companies will continue to grow in importance and direct to consumer is likely to continue to fall.”
New Star's philosophy is simply to get its message to the end-consumer. From its point of view, it does not matter whether this happens through IFAs or through the direct channel. The most important thing is that it keeps communicating to existing and potential customers.
This is a similar story with other groups so what impact will the shift away from direct advertising mean for intermediaries? Discount brokers could suffer falling sales but some groups believe IFAs will benefit as advice takes on increasing importance.
Threadneedle communications director Richard Eats says: “We will probably see another outrageously optimistic bull market but we will not see the industry launch a hard-nosed direct-marketing effort again – the FSA does not want it to.
“It is good news for IFAs because it must be disheartening for them to find out that their clients have bought some barmy fund on the back of a direct-mail offer.”
As customers are increasingly shepherded towards advice, there should also be, theoretically at least, fewer instances of misselling. Most structured products, for instance, were sold without advice. Another scandal on that scale is therefore less likely to occur again, with the FSA determined to clamp down on misleading literature and fewer groups and brokers going down the direct mailing route.
This can only be good for the industry but it does mean that fund firms – and brokers – will have to be more inventive to put sales on an upward trajectory.