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Matthews says wrap will build secure foundation

Standard Life life & pensions chief executive Trevor Matthews believes the development of the wrap market could solve the problem of client retention which is plaguing the life and pension industry .

Speaking last week in London at the Institute of Economic Affairs’ conference, entitled, The Future of Life Assurance, Matthews warned the industry that it must change its present model because the majority of reported new life and pension business is being recycled between providers and the amount they are paying to attract the business is unsustainable.

Matthews drew heavily from independent consultant Ned Cazalet’s industry report, entitled, Polly Put the Kettle On. Using an analogy of the big, bad wolf, he described the UK market as creating a “straw house model” which collapsed in the 1960s. He said the last decade, which saw the industry move away from direct salesforces towards open architecture, represented the “wooden house model” and the current move to wrap will usher in a much stronger industry business model or “a brick house model”.

The brick model is based on a transparent platform market that combines traditional risk-based and packaged investment products, leading to stronger long-term relationships and an alignment of interests between customer, provider and adviser.

Matthews said the size of the platform market at the end of last year was 16bn but the total potential size of the market for wrappable investments is 2,000bn. He said the expanding use of broadband technology is changing both consumer and adviser behaviour and providers’ ability to access and communicate with customers.

Matthews warned that changes to UK commission structures are all but inevitable. He pointed out that in Israel, the regulator has banned commission on financial products while in South Africa is investigating adviser remuneration.

Matthews said: “We really need a new model. The two fundamentals driving change are the ageing population and technology. The pattern of pension savings is likely to continue to change, which is a wonderful opportunity to put a lot of money in the pension system but we need a new model to sustain it.”

KPMG partner Craig Graham warned that analysts need to be educated in how to interpret life company results because the amount of money being recycled around the industry is not being picked up. He said that life companies should focus on manufacturing products because they are spending too much chasing unprofitable new business.

Graham said: “We need to educate the analysts. If you do not, they will focus just on the topline new business figures. All first-quarter 2006 business was up in the sector but there is relatively little information on margin. In the lead-up to A-Day, how much of that business was just circulating around?”

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