The financial services industry is facing up to the need for radical change. Even the biggest organisations are questioning how to remain a trusted long-term participant of the industry.
The question is how, in a rapidly changing environment, are financial services organisations to produce innovative products, expertly manage distribution and significantly improve customer experience in an environment where narrower margins and principle-based regulation impose severe constraints?
The implications of change on the distribution network are potentially severe. Too many organisations are using online technology to reduce IFA support while shifting the financial burden to the distributor network.
Given the low commission rates, what does the future hold for the IFA? Without a strong IFA network, just where can the customer go for trusted advice? Many firms are increasingly using online technology with the objective of enhancing IFA support but in a depolarised world is not easy.
The IFA distribution channel is competitively threatened by the emergence of multi-ties and, perhaps as a direct impact of treating customers fairly, the re-emergence of direct salesforces?
With the increasing pressures for realignment of remuneration models, moving away from front-end commission to fees and trail commission, what is the distribution model of the future?
A panel of leading current and former industry experts has addressed some of these issues in a round table discussion which is reported here.
The general consensus was that providers need to address falling profits and give an acceptable level of services to increasingly demanding customers but for many companies it appears the pressures for return on investment to be delivered today outweigh the much-needed commitment to investment in returns for tomorrow?
Bernard Brown, former CEO of Britannic Assurance and Resolution plc
David Carrie, former director customer services at Zurich FS
Phil Hine, former chief operating officer of Barclays Wealth Solutions
Ian Green, Green Legal & Financial IFA
Neil Sharp, Sharp Consulting (Strategy)
Adrian Moore, independent consultant
Andrew Lloyd, managing director, Lloyd FS Consulting
Hosted by Trish Henry, head of pensions & insurance for IT services provider Mastek
Trish Henry: People have been saying for years that the increasing power of the distributor is going to mean that life offices are losing power but how far off is the ultimate outcome? And why is the pace of change so incredibly slow. Is legacy technology to blame?
Phil Hine: I think the industry has changed radically. If you are a provider, the heartland margin products no longer exist. The challenges for life companies are managing the legacy – all the existing products, how to take advantage of opportunities presented by the new pension rules, for example, Sipps, and defining the new products which are relevant to consumers in today’s market.
David Carrie: We are in a transition period where the industry needs to change but there are significant constraints that are preventing change from happening.
TH: What are the constraints?
DC: There are many competing demands for available capital and there is huge inertia – both on the life office side in terms of protecting existing embedded value and on the distributor side in terms of past remuneration flows.
There is fragmentation on both sides. Everyone is trying individually to solve these problems. The lack of cohesion is one of the major barriers to the industry moving forward.
Ian Green: Another constraint is the lack of product innovation – a lot of which is due to the introduction of Government-designed products.
Bernard Brown: Inertia is a key issue but there is also a lack of understanding about the need to think about business from the customer’s point of view.
Adrian Moore: I think the problem lies with the IFAs. The IFA community is older, very much rooted in the past and reluctant to change business models.
IG: As an IFA, the dependency on the suppliers, the insurance companies, ensures the business is dictated by their terms. I think while the providers and their products still dictate the way business is done, power is not in the hands of the IFA.
Neil Sharp: There are very few distributors actually making money. Take pension transfers, for example, the impact is pretty much zero or negative in most cases. Moving money around is gradually eroding value.
TH: What will be the impetus for change?
AM: Over the next five to 10 years, the public will get a lot smarter about products. To change the model, you need to go to an unbundled wrap environment. Let life assurance companies do what they are good at – the risk side – and let investment managers do the investment management.
At the moment, there is no incentive for a life insurance company to take that route while they can still get away with some of the prehistoric products they are still selling.
TH:What have life and pension providers got to do to improve the relationship with the distributor and to get the distributor to do more business with them?
IG: I want a transparent product structure – including remuneration.
TH: What about service?
IG: It comes down to delivery. How is this going to be delivered? In the past, the IFA had free access to product information and quotes. Now it is my computer, my online time, my printer, my ink and there is hardly a scrap of extra commission.
For the IFA, that is changing the business model that does not cut it. It is just not good enough.
AM: The other side of the problem is reporting back to the client, a key part of the service which most of us forget. They – the distributors – often do not have the technology to report on all a client’s products.
IG: Problems are caused by legacy. How do you get an update on a policy that is 15 years old? You cannot tell the customer that it will take an hour to get or that you have to write off for it and it takes 21 working days. They are used to wrap prop- ositions and everything being online. Who is going to pay for that?
AM: There is a new business opportunity. Charging to find legacy information, mopping up old policies and putting them into an online wrap platform.
TH:So what is a distributor relationship in the new environment?
PH: It is about managing the customer proposition, delivering a statement of all the customers’ affairs and delivering the ongoing service in a way that makes sense to the customer and to do it all electronically with product providers.
But currently the customer proposition is not centred on the customer, instead it is centred on the product provider wanting to organise their business so it is very easy to do business with them but not with other providers.
Distributors need to break through this and deliver what makes sense to the customer.
DC: Many life companies do want to make all of the information available to you, the distributors, on an online basis, ideally on a published rather than subscribed basis.
It is already there for distributors in your platform, so you can produce information for whichever client s soon as you are going off to see them.
They have one slight problem. – legacy systems. The data you want is on six or more different platforms.
NS: I think there is a big opportunity to make distributor relationship management the new customer relationship management.
There is a genuine relationship between distributor and the company, albeit they are hostages sometimes rather than friends. But I think there is a concept that says deliver a flexible model that allows distributors to choose.
Then there are online consolidation tools. Consolidate commission, consolidate statements, enabling a two-way dialogue that allows the life company to track the IFA’s views and what is being provided.
Having automated tools that allow the IFA to tie the life companies into a central repository of information may be idealistic but there is potential to do it.
TH: What about the lack of management information within life and pensions and the inability to report to clients?
BB: But it comes back to where does a company make its profit? Most companies know their profit comes from sales, so they gather a great deal of information about their sales activity.
But when you talk about customer and operational aspects, complaint handling, TCF and risk management, all those peripheral pieces that affect profitability do not produce management information.
Data gets recorded but, by management information, I mean things that people actually use on the ground to improve things day to day. It is a rarity.
I believe there is profit to be had in better customer relationships and relationships with IFAs, if only life companies had better information.
NS: If you understand all aspects of the distributor relationship, not just volume, but quality, consistency, non-disclosure rates, profitability for clients they bring in, the life company can genuinely provide remuneration. It does not have to be at a very granular level but pay for business based on quality.
The quality of the information that exists in life companies varies dramatically. Even with good information coming through, it is nowhere near perfect. There is an army of people marching around grabbing data from all sorts of spreadsheets and databases.
What life company executives really need is a way of pulling together all the relevant information into one easy view. They would like to sit there in the morning, switch on and watch the business coming in.
TH:There is definitely capital in this industry and some great people, so I just can’t understand why change has not happened. All the building blocks are there. Why have they not been aligned?
DC: Nearly all life and pension companies have a significant legacy issue. They are trapped. They cannot see an economic case for getting off the platform they are on. A proposition that changes the economics of the transition could be highly attractive.
BB: I think there is money around, I think there are a lot of clever people around but I think the problem is of a such a scale that it touches many different factional interests.
It is not just a question of a better product or a better system to handle agency distribution. You need a better educated consumer, more people to be using the internet and the web as part of the distribution process.
You need more flexibility, whether you are dealing with a wrap solution or a life of a pension solution and it needs an industry response. It is not going to bring profit tomorrow.