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Fund supermarkets are the way forward

Hardly a week seems to go by without another fund supermarket either being announced or forming a strategic alliance.

The recent link between Skandia and AssureSoft is certainly one I will be looking to investigate when it goes live next month. I am increasingly convinced personal finance supermarkets are going to march straight to centre-stage in the financial services arena.

Indeed, we could see a situation where any product provider without the capacity to offer its own supermarket or reach into the vast majority of others will miss out on a massive opportunity. The launch of these services comes just as the whole question of polarisation is up for major review.

To understand the potential impact of supermarkets, I feel it is necessary to ask the question, has independent financial advice really been a success? For IFAs, and the product providers who work with them, there can be little doubt that it has.

IFA market share continues to grow year on year in virtually all areas but is the current model really the best option for the consumer? Although it may be seen by some as heresy to say so on these pages, I am increasingly beginning to question if it is.

This is not because of any failing in the IFA community but because the current regulatory process has forced up the cost of fees and commission so that independent advice is great but only if you can afford it.

In the real world, how many people, outside high-net-worth individuals, can afford to pay £100 or more per hour for fee-based advice or by commission-based products that have so much taken out of them at the front end to fund costs equivalent to such a level of fees?

I am in no doubt that, for the wealthy, the past 13 years or so of financial regulation have led to them getting an ever higher quality of advice and service but those on limited incomes who probably need the advice the most are least likely to be able to get it.

It is a sad fact of life that as an industry we have really only scratched the surface in terms of the use of technology. One only has to look at personal lines insurance to see how much business is conducted electronically.

General insurance, however, has not had the use of technology impededby an indirect benefit rule that hasseverely limited the opportunitiesfor providers to recognise investment made in technology that will reducecosts in any way other than direct discloseable commission.

Ten days ago, I had the chance to meet for the first time with Sam Jensen of Consolidated Funds, or rather CoFunds as as it has rebranded itself, the fund supermarket being backed by M&G, Gartmore, Jupiter and Threadneedle. I share much of his vision as to how the service they are planning can help drag the financial service market into the 21st Century.

Financial supermarkets not only have the potential to offer low-cost dealing services but also a far more efficient way of holding client information.

They can allow advisers and their clients to access information online 24 hours a day and, if all products are held via the supermarket, this could potentially offer a far more cost-effective way to manage such information. Potentially, this could provide an ideal environment for storing all their client records. One of the weakest links in the IFA technology armoury has been the back-office systems they use. With a few notable exceptions, this is generally of lamentable quality, providing limited functionality and delivered by companies which are woefully undercapitalised.

Operating via a supermarket-type arrangement, client data could be held centrally and delivered in different forms as necessary both to the adviser and customer. This could drastically reduce the cost of meeting the e-commerce aspirations of many IFAs.

If we move to a white-labelling environment where product providers become primary hosts for advisers, who in turn have access via the host office to a vast array of third-party fund links, it could well be possible to reduce drastically the cost of managing client services. Supermarket services could be delivery by a wide range of organisations, traditional product providers, technology companies and networks.

Although most supermarkets are unlikely to have access to every fund, with most aiming for at least a couple of hundred funds, are IFAs really saying they need access to absolutely every fund as they are able to predict with total certainty which funds will be most successful over 20 or 25 years?

With a wide enough range of fund links and using complex scientific computer models to identify clients&#39 true attitude to risk and examine in far more detail than is commonplace in the UK today, it should be possible to deliver highly automated advice services.

These technologies are already in use in financial services industries elsewhere in the world. The aim is not to remove the human element but to reduce the cost of delivering a personal service.

The high-net-worth client who can afford it may still want to pay for full-blown independent advice. However, by using supermarkets in the ways I have outlined above, it should be possible for advisers and product providers to offer a whole new range of financial advice services to millions of people who, although not poor, are still financially excluded due to the current high cost of conventional advice.

Current industry estimates sugg-est there are around 24,000 indivi-duals registered within IFA firms. With a working population of 26 million, even not allowing for the retired commu-nity, this suggests a target marketof more than 1,000 clients per registered individual.

Using current industry processes and pricing, how many advisers are able to fully service more than 200 clients?

Although embryonic at this stage, supermarkets present a compelling argument. As the Department of Trade and Industry recently recognised in its Foresight report on financial consumers in 2010, the shape of financial regulation may need to change before many consumer benefits can be achieved.

It is, to say the least, unfortunate that a Labour Government which claims to be so keen to help the financially excluded has passed a Financial Services and Markets Act that takes little if any account of the way in which e-commerce could transform the way people are able to manage their money.

Is it unreasonable to consider a campaign to repeal the legislation and replace it with something more consumer-friendly before the act has even come into force?


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