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Mind the savings gap

The last couple of years have been anything but dull for those in the financial services industry, particularly for financial advisers.

Issues have arisen across so many areas – misselling scandals, highly volatile markets, margin pressure, regulatory change and industry consolidation are among the more major themes that we have seen. The challenge facing IFAs is not just to cope with this change but to react positively to it, positioning businesses for future growth.

In respect of regulatory changes, the key event of the last year has been the publication of the Sandler report. Sandler made it clear at a recent seminar at the Investment Management Association that he was confident that many of the suggestions made in his report would ultimately be adopted.

It is worth remembering the context in which the report was undertaken as it helps explain the Government&#39s motivation for change which is more complex than the crude industry/ IFA bashing characterisation it is sometimes given. The context can be outlined as follows:

•There is a desire to see reduced dependency on the state for welfare provision, particularly in old age.

•There is a savings gap, particularly in the less well off parts of the population.

•The UK savings market is perceived to be characterised by complex and opaque products – effectively giving people a disincentive to save.

The evidence of the savings gap is something of statistical fact. How much the gap can be closed through product or related changes is unclear. Compulsion is something that is often debated but it seems fairly clear this is not an area the Government is keen to explore.

This is understandable in a political context as it could prove a big vote loser in an election. Without compulsion, however, closing the savings gap is inevitably a much harder task. One of the key recommendations of Sandler&#39s review was the introduction of stakeholder products. This has had mixed industry response on a number of points, in particular:

Potential for misbuying products

The apparent simplicity of the products could lead savers to conclude that they do not need help with financial planning/ product selection. This will inevitably lead to some savers misbuying products. Sandler has said that although he thinks stakeholder products could be viewed as non-toxic products, this does not mean they should be viewed as risk-free. He believes the rule of caveat emptor should apply to these products. That said, he obviously believes that the simpleness and the transparency of these products should minimise these issues.

Fee caps

Sandler has suggested 1 per cent as an appropriate fee cap, citing the reduced costs for businesses selling stakeholder products. No know your customer requirements, reduced adviser supervision costs, etc. Clearly, industry experience with Cat standards and stakeholder pensions suggest the Government will need to be flexible on this if it wants these products to be successful.

Active •passive

Sandler has denied that he is anti-active management. Instead, he claims that the retail market is unhealthily biased towards active management. He would be happier if the proportion of retail funds managed passively were about the same as seen in the institutional market.

I am not convinced by his arguments in this respect and feel the attractiveness of passive management is not as clear cut as has been suggested. That said, if the fee cap remains at 1 per cent a year, it is questionable whether there will be many products, other than passively managed, that will be economically viable to deliver.

Despite industry misgivings, it seems highly probable that stakeholder products in some form will be introduced. The other catalyst for market success of these products would be changes as outlined in CP121.

Appropriately structured, stakeholder products could be ideal products for sale over the counter throughout banking and building society branches. But what about IFAs? Realistically, stakeholder products could damage IFAs&#39 existing business as clients are attracted by the brand and big marketing spend of the banks.

IFAs need to be aware of these threats to their business and develop strategies accordingly. If the Government botches the introduction of these products, these threats might not materialise in a significant form. That said, it would be dangerous to stake a business plan on this scenario – one has to assume they will have learnt from past failings.


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