So, how does a life company get to be market leader in the IFA market?
We have seen product providers come and go but some seem to go on forever. Standard Life, for example, have created an awesome franchise in the IFA market over many decades. It puts me in mind of a story from Cambridge. American tourists admiring the immaculate lawns at Jesus College would ask the groundsman: “What do I have to do to have a lawn like that back home?”. To which the groundsman would reply: “It is very simple sir, all you need is 600 years of mowing and rolling.”
Given our shareholders cannot wait 600 years, how can the rest of us compete?
The most obvious battleground is price. The trouble with that is the impact on profitability. Some of you will have seen the article by Deborah Hargreaves in Saturday's FT in which she made the case for insurers' need to earn adequate profits. She is correct – we need to defend our profitability not just in the interests of shareholders but because if margins are too slim then we simply have to move away from markets that are insufficiently profitable – and that does not help IFAs or their customers.
What about product design? The trouble with that is that none of us has succeeded in patenting new products. In the main they can be copied by the competition very quickly.
It is also true that the IFA market is generally conservative when it comes to new product ideas. If we invent something new, it is tough for us as a single company to convince the IFA market on our own to take the product seriously. Drawdown is a good example. When first invented, IFAs took it up slowly. What made the market viable was the entry of lots of other product providers.
Last year, Prudential introduced a flexible lifetime annuity. Those IFAs who recognised the scope it offers for sophisticated financial planning to get around the perverse restrictions on annuities have embraced it enthusiastically. But with just 170 Prudential account managers talking about it, it will take time for the idea to achieve its full potential.
Either way, product innovation alone does not seem to be a single viable source of sustainable competitive advantage.
How about investment performance? Aggressive promotion of short-term investment performance is usually a recipe for disaster. What does work, in my experience, is delivery of what was promised, whether smoothed investment vehicles or exposed investments.
If that last thought has any substance at all, who would we expect to be market leaders? The top investment performers of course. Yet in the three years I was running the DBS Network we saw no evidence that any of the three factors – price, product features or investment performance – was a sustainable source of competitive advantage.
In fact what we saw was the opposite. Huge variations in market share across the country: same price, same product, same investment performance. The only way I could ever rationalise this was the variation in the quality of the account managers. This may be a very simplistic view but people do matter. They are our eyes and ears in the marketplace and an often under-used resource.
I have no doubt at all that account managers who are head and shoulders above their competition are a sustainable source of competitive advantage. But despite that, for many some companies the IFA representatives seem to be at the bottom end of the food chain. As competitive pressures continue apace this is one resource providers will ignore at their peril.
Director, Prudential UK Intermediaries