Earlier this month Money Marketing considered a Frankenstein scenario that might play out if life insurers and platforms pursue aggressive vertical integration. I believe there is an alternative scenario, where realignment of the value chain could deliver significant benefits to the most important party of all: consumers.
What if, rather than manufacturers extending into distribution, the change was horizontal in direction, with advice firms taking more of the value chain through working with technology suppliers and other partners? Horizontal arrangements, free from ownership conflicts, can allow greater impartial oversight.
Typically, such realignment projects are driven by organisations looking at how they can extract more value for their shareholders. If you begin with how an adviser (who has the closest relationship with the client) can deliver a better consumer proposition, there can be big wins for both the client and the advice firm.
The adviser’s role and how they add value has changed significantly in recent years. In the 1980s there was a real case for an independent adviser picking between the best and worst products offered by life offices. Let’s face it, some of the charges that were embedded within some providers’ contracts were scandalous. Today, that is no longer the case – at least for product wrappers. Price caps and limits on exit charges are making the vast majority of product wrappers homogenised.
Retail fund managers are still vastly overpaid. As markets become increasingly efficient it becomes harder and harder for asset managers to deliver true alpha – in practice, the only part of their businesses that can justify anything like the level of charges they have got used to. Passive or so-called smart beta strategies are effectively things that can be automated and, like any other automated service, it is only a matter of time before their price becomes commoditised.
The combination of these factors means a greater part of the adviser’s added value comes from good financial and tax planning, which have far more impact on overall returns than picking individual investment funds or product wrappers.
Technology means many tasks that were previously highly labour intensive, requiring actuaries and other staff, can be automated for a tiny fraction of the price they previously involved. The ability to harness these resources was where many life offices added value. More recently, however, technology suppliers have replaced much of this infrastructure. Now it is increasingly practical for large and even medium size adviser firms to leverage the same services.
One only needs to look at what True Potential and Best Practice have achieved in recent years to see that this model can work very effectively. When these firms looked to put in place their own platform infrastructure a few years ago, SEI was pretty much the only game in town. Now a number of others with similar capability are looking to assist advisers. More international players are planning to enter the UK market soon too.
I have recently been involved in several platform review projects for large firms, which have reached the conclusion that restructuring their propositions towards more horizontal models would significantly reduce the overall cost of advice, investment and wrappers to clients. Firms could actually increase their own charges, proportionate to the additional value they are bringing. Typically this has been for firms with in excess of £1bn assets under advice but it is clear the process could work for significantly smaller firms – possibly those with as little as £250m AUA.
Post-RDR the adviser is very much in the driving seat. With their direct relationships with customers and their ability to deliver more value via the planning services they provide, they can increasingly leverage their distribution capabilities to achieve better deals.
Such changes would represent a radical shake up of the industry but I believe this direction of travel is now unavoidable. Technology will enable new lower cost services that will significantly disrupt the margins life offices, platforms and asset managers can achieve.
To me, the only question is whether traditional adviser firms will evolve to take advantage of this, or will a new breed of adviser need to emerge? Either way, the consumer will be the real winner.
Ian McKenna is director of the Finance & Technology Research Centre