For all their professed commitment to independent advice, life companies hate advisers’ independence and lust after owning distribution. Continuing with my recap on my experiences of the last 36 years, Hill Samuel taught me that they all have a secret hankering for the days of the direct sales force.
Hill Samuel’s strategy was, on the one hand, to own a supposed independent financial advice firm in Noble Lowndes, while simultaneously propagating a captive direct sales force. The customers’ interests always came as distant second, often in the ways that look scandalous to our eyes today.
Back in the early 1980s so-called “capital conversion schemes” were popular. One involved using a lump sum to buy a five-year capital protected temporary annuity, which would then fund £20 per month into the government’s save-as-you-earn scheme: a regular savings deposit account that promised index linking plus, at the end of five years, a bonus equal to three months’ contributions.
Depending on interest rates, which in those days often fluctuated monthly, the typical cost would be around £1020 for a contract that would fund a total of £1200 into the scheme over five years. That was based on a standard 2 per cent commission rate on temporary annuities as fixed by the old Life Offices Association’s maximum commission agreement.
However, the agreement paid no attention to what groups did internally. Hill Samuel paid Noble Lowndes’ consultants 8 per cent by the simple expedient of shaving 6 per cent off the rate at the client’s expense, typically boosting the cost of the product to around £1080. It does not sound much these days but it was a fair sum back then.
Other products had similar incentives built in to persuade Noble Lowndes’ consultants to keep the business flowing to Hill Samuel Life Assurance Ltd.
Maintaining your independence
After I had crossed over from the insurance company side of the business to the adviser side, Knight Williams showed the vertically integrated model could work well if done properly, as Towry and St James’s Place have proved.
Knight Williams’ Robin Knight Bruce famously described consultants who sold non-Knight Williams products as “compliance nightmares”. The press slated him for it but he had a point. When those doing the selling do not own the business and therefore do not carry the can, some will sell rubbish.
The compliance overhead required to quality-control a large independent adviser force makes the large independent model uneconomic. A restricted model should contain costs. Knight Williams’ sin was to be restricted while pretending to be independent, while simultaneously being more expensive than pretty much everyone else.
The DBS network was independent in the sense panels were compiled objectively. However, the life companies put temptation in the way of members and DBS encouraged them to do it, aggressively soliciting egregious commission deals.
“Knight Williams’ sin was to be restricted while pretending to be independent, while simultaneously being more expensive than pretty much everyone else.”
Did it impact independence? Of course it did. The proportion of investment bonds sold compared with collectives said it all. Sure, DBS members could give up commission to enhance the investment for the client but not many did. It was pretty much down to the ethics of individual member firms and their individual advisers.
Next month, in the final part of this series, I will try and draw some conclusions on the future for independent advice.
Neil Liversidge is managing director of West Riding Personal Financial Solutions