Life companies have finally come to the conclusion that they can no longer sustain the current industry model which is wedded to indemnity commission. This set-up resulted from the way the life companies originally transacted their business, when each had its own salesforce.
But these salesforces have long disappeared and have now become IFAs. Most of us came from this type of background. I started as an MI salesman in 1989 but after six months I saw the light and joined Roxburgh Financial Services, a big City-based IFA. As you can see, my route very much mirrors most people’s path to becoming an IFA.
MI and Roxburgh took a big part of the income that I earned and this was fair because they provided the office, the phone, the back-up required and, in some cases, the clients. All I needed to do was turn up in a suit and transact the business.
In MI’s case, I think it took up to 60 per cent of any case I wrote. What would have been the point of me being a fund-based adviser since I was giving away such a big proportion of my income? Surely the thing to do was to maximise the amount that I received up-front?
My point is that this model still exists in our industry. As long as this type of adviser exists, there is no incentive to build a long-term business.
Our industry has an aging population which has received indemnity commission all its working life and is now nearing retirement. Why would anybody within five to 10 years of retirement change their business model to fund-based when they will not be paid fund-based commission on their past business?
Research was carried out recently on how long it will take an indemnity-based adviser to change to a fund-based adviser. It arrived at a figure of seven years.
It seems that life companies have finally figured out that they cannot carry on with this model because it is actually losing money. Networks know that the Government does not like commission payments and therefore sooner or later will abolish them. And insurance companies do not want to continue paying indemnity commission.
It seems that the only people who still want indemnity commission are IFAs and possibly individual clients who may find their costs increase as IFAs are forced to charge fees.
Nobody seems to write any real new business so the actual amount of new money that ever comes into the industry is a tiny proportion of business written. We all know this situation exists. Ninety-five per cent of brokers would not survive without indemnity commission. I can honestly say, five years ago, I would have placed myself in this 95 per cent.
Five years ago, I looked at the way I was writing business, the movements being made by the FSA and the Government and what other businesses did to build value in their business. I decided that I had to have an income base that was not based on new business. To this end, I started doing all my business on the basis of fund-based commission.
From that time, it has taken us as a business five years to produce as much income as we did five years ago. It is a decision that is fundamentally difficult and financially detrimental in the short term. This is the decision facing our industry.
The industry is wedded to indemnity commission. I believe the fat lady has appeared on stage and is about to sing the death of indemnity.
It is now a matter of inevitability that this form of payment will die. How our industry deals with that will be interesting to see.
John Winful is a partner at Winful Associates.