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Nic Cicutti: Bank advice has failed due to its short-term focus

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As many of you will know, I dodged out of London a few years ago and moved to a far more blessed location in the New Forest. It still provides fast access to the Big Smoke, but without the constant background wail of police sirens.

Stay with me on this one: I mention it because last week I was reading in Money Marketing that the British Bankers Association is to review bank advice business models following a decision by several members to pull out of bancassurance.

A little while ago I wrote somewhat disparagingly about bancassurance. Many IFAs have described the disappearance of banks’ advisory arms in lachrymose terms. I read one comment saying it was only the efforts of small armies of salespeople knocking on doors up and down the land that maintained the savings habit among the UK population over the years.

Perhaps 30 or 40 years ago they might have but the new army of bank salespeople have never knocked on doors or got their shoes dirty. They simply work phones or strong-arm punters who walk into their local branches. These people were geared primarily to selling inappropriate products with massive hidden charges to clients who did not need them.

Some industry figures agree with this view. Syndaxi Chartered Financial Planners managing director Robert Reid summed it up for me when he said: “You have to question whether some of the advice people got from banks in the past was worth paying for. I do not think people should just get advice for the sake of it. It has to have a value to it.”

By coincidence, last week a plumber came round to service our boiler and do one or two other urgent jobs. If you have lived in the big city, you’ll know how difficult it is to find a good plumber – and how extravagant their callout charges are in an emergency. Well, not round here: our chap charged us £150.

Chatting to him, he has about 250 clients in the area and between new boiler-fitting and other more expensive projects for which he hires help in by the day, as well as smaller work like ours, he averages gross earnings of about £300 per client per year. Most households pay £75 to £100 per visit.

Admittedly, he doesn’t have heavy office admin costs, or the financial burden of regulation and FSCS levies, or the hours of preparation and research needed to give compliant face-to-face advice. Equally, he doesn’t receive any trail in respect of previous work he has carried out, a massive continuing income stream for most advisers.

The only way he could match an IFA’s long-term earning potential is if he charged on the basis of a property’s overall value, or he received trail based on each chargeable visit to a home.

But he sticks to one-off payments and as long as he carries on doing a good job, he will put food on the table at home.

And that, I suspect, is why the bancassurers are pulling out of the advice market: unlike my plumber, they don’t do a proper job.

We have two high street bank branches in our village, with barely a couple of staff working in each. To paraphrase now-deceased BBC reporter Brian Hanrahan, they count the money in and count it out, with not much else in-between.

In my chats with them, it’s fairly obvious they have limited insight into the challenging world of financial advice. The best they might do is set up meetings with other colleagues, who may be more glib than they are but have barely any greater understanding about the subject – unlike my plumber, who has a genuinely marketable skill.

Which helps explain how it is that, in another astonishing story in Money Marketing last week, Axa was quoted as saying that the reason for its decision to pull out of the bancassurance market was because it would have had to make 6 per cent, presumably of the product’s value whenever it is sold.

The only way I can “compute” that figure is if we assume that whenever an Axa product is sold, the bank employee doing the selling is never required to review it annually or give ongoing advice about it or any other financial issue affecting the person who bought it or their family.

Each transaction is treated purely on its own merit and not as meeting part of a series of inter-related needs, with the customer unlikely ever to be seen again. In other words, there is no long-term value in respect of any transaction between Axa, its bancassurance partners and individual clients.

In that kind of environment, I can imagine Axa walking away from its relationship with the Co-op and Clydesdale and Yorkshire Banks, none of them admittedly great powerhouses of financial advice.

But in that case, all that does is confirm what people like me – and many advisers who email me privately – already know: the RDR is helping to kill a purely sales-driven model of “advice”, like bancassurance.

The “advisers” most likely to suffer are those who operated closest to that model, some of whom were able to call themselves IFAs until 31 December 2012. Those suffering the least are the ones who created distance between themselves and that model long before that date.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 2nd May 2013 at 9:41 am

    Plumbers (who are also Heating Engineers) most certainly are subject to regulation, Nic. My plumber came round the other week to give my CH boiler its annual check up and service and, as usual, we exchanged updates on our respective professional lives.

    I told him that for me things are going reasonably well except for the relentlessly escalating burdens of (over-)regulation, to which he replied Tell me about it. He has to undertake far from inexpensive annual re-validations of his knowledge in various areas whilst electricians must do likewise and, for example, prove ownership of a special torque-graded screwdriver (which costs over £100) just for tightening the screws securing the wires in power points.

    Regulation is everywhere and its excesses and stupidities are equally resented.

    As for recurring revenues, have you not seen the British Gas regular payment plans that cover regular boiler checks and call-outs for boiler failures?

    Those points aside, as I’ve observed elsewhere, if AXA (or any other provider) cannot operate profitably on a sales charge of less than 6% (probably from the sale of a single AXA product), there must be something seriously awry with its business model and overheads. If the FSA’s RDR consigns to history those sorts of sales charging structures, it’ll be no bad thing.

    Most IFA’s do a far better job (with an ongoing service proposition as well) for half that percentage or, from larger investments, probably less. Consumers are gradually waking up to that fact so, as you suggest, those of us who manage to keep our heads above the relentless tide of costs, bureaucracy and red tape in the brave new world without drowning may just thrive.

  2. RegulatorSaurusRex 2nd May 2013 at 9:45 am

    YAWN!!!

    Can’t see the wood for the New Forest.

  3. “The only way he could match an IFA’s long-term earning potential is if he charged on the basis of a property’s overall value, or he received trail based on each chargeable visit to a home.”

    £75,000 gross a year with minimal overheads – I am sure that the majority of IFA’s out there would love that.

    Whilst I agree with your thoughts in this article I think your attitudes (like those that drove RDR) have been coloured somewhat by stories of city based advisers earning ridiculous amounts of money.

  4. “a far more blessed location”
    I live in a blessed location also and £75kpa would be very nice.
    Like MP’s I really do wonder if you live in the real world Nic?

  5. Paul Mitodger 2nd May 2013 at 2:44 pm

    Now, if I recall correctly, Nic has frequently hit out at the salespeople who work on a more or less transactional basis.

    These salespeople (and I’m one of them) receive or received payment on a one-off basis, particularly if its a mortgage or protection plan.

    So I guess what Nic is saying is that transactional advice is okay…in fact it’s truly consumer-friendly.

    What a volte-face!

  6. £75K AND a MASSIVE continuous income stream.
    Must be London Lordies he is talking about.
    Not available in this blessed location.

  7. Dick Sprinkler 2nd May 2013 at 3:41 pm

    ‘Bank Advice failed due to short term focus’

    No it didnt Nic that was not the reason at all

    Try to work out why they failed again and report back when you have worked it out !

    No I’m not going to give you a clue !

  8. Paul Hartford 2nd May 2013 at 4:23 pm

    Whilst we have all known for years that the banks have sold products not given advice ,that in itself was not wrong or bad for their customers.In many cases protection policies have been life savers and small savings plans,ISA’s and pensions have been great for many savers.What has been wrong has been the incessant drive for staff to sell at every opportunity and in many cases where the clients best interests were not to the fore.The staff themeselves are generally not to blame as they were under massive pressure to sell sell sell, though many bank advisers struggled with simple concepts .Howvere where Nic should be directing his comments is to the top of those banks where this unpleasant culture started (back in the 1980’s) and was pushed to its limits in the chase for bigger and bigger profits ,which in turn led to massive increases in salaries ,bonus’s and share options over the last 30 years.IFA’s are not bemoaning or defendin,the loss of Bank advice per se, they are expressing the concern that under RDR many people will have no access to any form of advice in the future just at the time they need it most (unless you count MAS,which none of us who have endured years of exams do)! Surely this goes completely against everything RDR was intended to do and leaves the loser as the public yet again,through the lack of a well thought out ,coherent and viable plan for this industry,what is left of it.So Nic when you have finally worked out what the real problem is ,you might go and put your journalistic talents to laying the right questions at the right doors ie the boards of the main banks and the regulator,though funnily enough they are now almost indistinguishable since gamekeeper turned poacher in the guise of one H Sants!!

  9. An interesting and valid view if a little blinkered and parochial. The financial advice system in the UK is one way of doing it.

    In many countries, including the US, Australia and many in the EU, the concept of advice as we know it doesn’t really exist. Commission is paid, people are sold policies and investments and individual risk assessment simply doesn’t enter the equation.

    Need an investment? Here’s one, take it or leave it.

    You should have life cover… this one fits the bill.

    And so on.

    Simple and yet effective. Unless they are doing it completely wrong and dream of adopting the UK model then it’s just a different way of doing it.

    Whatever the model, good people will do right by their clients and the bad people will do bad… whatever the rules, regulations or system of payment.

  10. @ Grey Area

    I’m really not sure what you’re talking about here. RDR was based on the Australian model of financial advice – commission was banned there a number of years ago.

    The US have an RDR-lite system, whilst countries like the Netherlands have also introduced what is effectively a commission ban. Indeed the European Commission is looking to the UK as a model of how it wants all EU countries to work.

    Look, RDR happened. It just did. We all now have to get over it and move on. Moaning about how times have changed won’t help you or a single client. Time to get on with some real work i suggest.

  11. @Julian Stevens – Unfortunately Julian your anology of IFA doing better job for half the 6% quoted by Axa is incorrect. Assuming that is that the ongoing service you speak of is charged at .5%pa. I say this beacuse at recent event it was explained the 3 + 0.5 trail (or AC now) is exactly the same as 6% initial based on a single premium lump sum with a 7 year life expectency. The actuaries actually explained that this is where the 3+ a half stems from. So either way it is the came cost to a client.

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