- Helen Monks
- Robert Reid – Principal, Syndaxi Financial Planning
- Ken Davy – Chief executive, SimplyBiz
Depolarisation of the financial services industry earlier this year means that distribution has turned almost full circle in the past two decades.
In 1985, when Money Marketing was launched into an unregulated market, providers were looking to grab distribution at any cost, paying large amounts of commission to unqualified advisers to push their products.
The Financial Services Act 1986 introduced polarisation, with the aim of distinguishing clearly between independent advisers and those selling the products of one company.
Sesame commercial director Charles Bryant says: “Over the next 12 years, we saw a shift in the importance of distribution, seeing the rise of the tied agent, from door-knockers to agents owning their own business, as well as rise of the IFA.“
But looking through Money Marketing‘s archives, it is possible to see that, as early as 1996, the end of polarisation was being predicted. The IFA Association was readying to lobby the regulator, the PIA, which it was believed was in favour of stirring up the clear waters between independent and tied advisers.
After the turn of the century, a new scramble for distribution saw life offices compete to buy stakes in successful advisory firms ahead of expected changes in the polarisation regime.
Today, consumers are faced with increasing numbers of less qualified multi-tied and tied operators, liberated by a relaxed regime and more strictly designed products.
Park Row head of corporate and private clients Peter Sprung says: “Distribution has almost gone full circle but not quite – that might have to wait another two or three years. We are moving towards a market where lower qualified advisers will be selling products at commission levels higher than a few years ago.“
IFAs have worked hard to communicate what differentiates them from non-independent advisers and there are concerns over how consumers will be affected by the latest changes. Informed Choice managing director Nick Bamford says: “There are people in charge who do not know what they are doing, least of all about consumer protection. Inappropriate change will not deliver heightened consumer protection.“
Towry Law director of strategy Charles Levett-Scrivener says: “The problem with depolarisation is that, in liberalising the regime, we are replacing one very complicated set of rules with another which will bring about unforeseen consequences.“
Bryant argues that distribution trends have been driven largely by regulation but, in future, will be more about achieving the right advice offering for clients. He says: “In the past, there may well have been compelling reasons to see an adviser but, more recently, consumers are able to get products quicker and more cheaply elsewhere.“
Sprung says the most significant change is the shift in emphasis away from the regulation of companies distributing products towards the regulation of the products themselves.
This approach has developed as the Government has sought to increase savings by low earners. In 2001, a Treasury report recommended that a range of simple products be made available. This has resulted in a suite of Government-designed products meant to be sold with very little advice.
Stakeholder pensions were introduced in April 2001 and, following a review by Ron Sandler into medium- and long-term savings, the Sandler suite appeared in April 2005, including the child trust fund, a cash deposit account and investment product.
FSA director of retail policy Dan Waters says: “We have created a more off-the-peg style of selling that should suit consumers who are looking for an alternative to full advice.“
But Sprung says: “These products are designed to be able to be distributed over the phone and online but, without anyone selling them, the buying public is not going for them.“
A recurrent theme over the history of Money Marketing has been warnings that the end is nigh for IFAs. Scottish Life head of communications Alasdair Buchanan says: “Various pundits have predicted the end of the IFA distribution channel. In reality, IFAs have been the most successful distributors by a considerable margin. Over the last two decades, time and again, IFAs have risen to the challenge of change.”
Robert Reid – Principal, Syndaxi Financial Planning
Instead of looking backwards, let us climb into our Tardis and travel forwards in time to 2025. In the last 20 years, IFAs have secured the professional position we sought back in 2005.
As one of the team who strove to achieve the much needed chartered title, I accept that, at times, I and others ignored the fact that professionalism is more than a title, it is a way of life.
The introduction of the menu simply hastened the rationalization at the FSA, now split into two divisions, retail and wholesale. The public had been thoroughly confused as the banks drove the proverbial coach and horses through the status disclosure rules. Our saviour came in the form of the FSA’s Treating Customers Fairly initiative. The intermediary market suddenly recognised that we — not members of the public – are the clients. Since that revelation, life has been so much better. Service is now so good that we have no reason to complain.
But we have witnessed significant reductions in the numbers of advisers, falling as low as 40,000 in 2010, then building steadily since. Providers had to ensure their offering was suitable to a smaller but far more discerning IFA community.
The new intake came from universities as they finally realized that there is a finite number of solicitors and accountants needed. Our position as a profession was finally secured.
The sea change came about when the regulator realised that many problems came not from advice but from product design, where the intention had been to obfuscate and not inform. Once truly clean products were on sale, consumers could see the core costs and what was being allocated to pay for advice.
If an adviser wanted to take 7 per cent on an investment bond, fine, but the transparency in products would make it difficult to compete with the firm taking 3 per cent. People can sense value but, equally so, a poor bargain.
Now people recognise the value of professional advice and actually seek us out. The loss of contribution-linked commission as a form of remuneration does not seem such a black day.
Will that be how it all pans out? I think that, to run a successful and profitable business, we
need to lose our fear of change and take control of our destiny.
Twenty years ago, distribution was unregulated. Anyone could sell anything to anybody in a marketplace which was everything but transparent. Direct sales forces pretended to be independent while broker sales teams looked independent but often promoted one company’s products. Alongside this confused market, a small but growing number of firms were building genuinely independent practices delivering high-quality advice.
In 1985, the Government announced plans to regulate financial services. The original proposals would have eliminated the new breed of independent – which included me, so I launched a campaign for changes which generated record support from advisers. I also had discussions with the minister responsible, a certain Michael Howard, and many others, with the result that the Financial Services Act 1986, while not perfect, provided a framework which I believed would allow IFAs to prosper.
When regulation took effect, providers rushed to control distribution by buying estate agencies in the belief that IFAs would disappear. After wasting millions of pounds, providers moved on to recruit tied agents. In the early 1990s, millions more had to be spent to unwind these disastrous strategies.
The one thing everybody continued to agree on was that the IFA sector would collapse. That this assumption proved so spectacularly wrong can largely be attributed to the creation of the network concept, which provided vital support for IFAs in the 1980s and 1990s. At their peak in 2002, networks accounted for over half of all IFAs while the market share of IFAs had risen to about 60 per cent from a pre-regulation share of 20 per cent.
Since 2002, the IFA sector has continued to grow but the need for networks has declined, with successful firms choosing to be directly regulated while buying compliance support.
Polarisation – the very instrument which brought clarity and choice to consumers – has now ended. When this was announced two years ago, the pundits again forecasted the end of IFAs. Surprise, surprise. Now depolarisation has arrived, strategies are again being adjusted to serve a dynamic IFA market. Quality of service will ensure we continue to have a strong, profitable and client-driven IFA sector for the foreseeable future.