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Nic Cicutti: What is stopping a decent tied advice service?

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What are the obstacles to resurrecting a viable life company salesforce? I ask the question because last week I wrote a slightly tongue-in-cheek column asking what was wrong with the idea of a “well-trained and tightly regulated direct salesforce, offering a limited suite of good-value products”.

The replies, sent to me both at my personal email address and also at the bottom of the article on Money Marketing’s website, were extremely interesting.

Many of the direct emails involved personal reminiscences of what it was like to be a salesperson in the 1980s and 1990s. One correspondent, now retired, sent me an entertaining (if slightly scurrilous) 1,500-word memoir, including superb descriptions of the personalities he worked alongside.

Most of those who contacted me waxed lyrical about being a life company salesperson back then.

The general feeling was that once you got past the first few difficult months and became confident in the job, life was good. It was not too difficult to make a reasonable living and if you were motivated you could be earning significant amounts.

There were minimum sales targets to meet, of course, but these were mostly easy to hit – especially at a time when regulation was nowhere near as onerous as it is nowadays.

The problem, of course, was many of the products were expensive and structured in a way that punters who made policies paid up or surrendered them before they matured often got back a lot less than they had paid in.

Why is this? The logic of the situation is explained succinctly by “Matthew”, who contributed the following below my online column: “Salesforces have only one driver – numbers. Numbers equal profit.

“The board develops a proposition (usually transactional with poor value products) that creates a margin, they calculate how many sales will be required to hit a pre-promised profit level then pass this to managers to push sales.

“Once the numbers are achieved, everyone is happy and rewarded accordingly. The customer is always a secondary consideration.” I suspect Matthew is right. At the same time, it strikes me that short-term greed will always come back to bite your backside.

Back in the early 1990s’, one of my Money Marketing colleagues was Iain Anderson, now the grandly-titled “director and chief corporate counsel” at the public affairs consultancy Cicero Group. Back then he was a spotty young reporter covering life companies.

I still recall the palpable excitement in Money Marketing’s office when Iain came in with an exclusive story to the effect that NatWest was proposing to set up a bancassurance arm, to be headed by Lawrence Churchill, now chairman at the FSCS as well as Nest. NatWest was soon followed by Barclays, Lloyds and other major banks.

It sounds almost incredible to say so today, but at the time many at Money Marketing wondered whether the emergence of bancassurance marked the beginning of the end of both traditional life company salesforces and – potentially – of IFAs themselves.

The assumption was that bancassurers would create a suite of cheap products and target a captive audience of millions of bank customers with them, wiping out independent advice in the process.

So worried was Garry Heath’s old advisers trade body, Nfifa, that he even set up a short-lived campaign – BankWatch – to focus on the banks’ nefarious activities.

Ironically, within 18 months it became apparent that bancassurers were posing no threat whatsoever to the IFA sector or of standard life companies. Their products were rubbish and the training and sales skills of their salesforces seemingly worse. Life companies saw off the challenge and their continued existence had no real impact on the way independent advisers carried on their business. As more recently, over the past year or so the banks have gradually withdrawn from the market completely.

The lesson I draw from that entire experience is that if you try to create a sales operation geared to maximising profits from Day One by offering poor value, misselling along the way, you will get found out quickly. The people who should have beaten a path to your door – millions of bank customers – will end up shunning you instead.

Does it always have to be like that? I do not know the numbers in terms of what might constitute profit or loss for a bancassurer. But it strikes me that top IFAs have long been able to create and keep viable businesses through their knowledge of the market.

Intriguingly, firms like Virgin Money have tended to do the same on the banking side with simple saving, mortgage and tracker investment products, as well as basic term assurance. It did not have to be the best in the market, just good overall value – and Virgin was able to create an interesting niche business out of it.

So cannot life companies – and banks for that matter – go back to the drawing board and build the type of slow-burn operation that does not treat customers as mugs and marks to be taken advantage of, but human beings to be nurtured and cherished over decades. It is not the RDR that stops them doing so, is it?

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

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. The reason why the banks have pulled out of the mass market is that there was not enough money in it for them to continue. Apart from the costs of regulation and training salespeople there were the regular fines imposed by the FSA and resultant bad publicity to contend with. In the end they decided that it was more trouble than it was worth.

    Going forward the mass market will have to rely on a do it yourself approach using the internet. Protection products can be purchased quite easily using the internet. Pensions and investments may be a bit more involved and if advise is required a fee will have to be paid. At the end of the day consumers cannot expect to receive advice on the basis that they only pay if they decide to purchase a product. If you are paying for advice, that is exactly what you are doing and payment will have to be made whether a product is purchased or not.

  2. Good article Nic. I for one would be happy if the companies could make this happen however I don’t think it is commercially viable under the current regime. The main reason being the costs that involved in running a fully compliant and well trained direct sales force is immense and therefore the insurance companies are unlikely to be able to set “cheap” or inexpensive products and expect to make some profit.

    Like most of your other of your readers and bloggers I started out as a salesman for an insurance company back in the 80’s, only just mind you – May 29th 1989 (and to this day I still class yself as professional seller however that is a different story). However It was an employed position but commission only remuneration but had all the normal perks of pension PHI DIS private medical insurance etc etc – their commission rates were really cr*p (£240 for a £100pm pension or £75 for a £25pm 10 year savings plan as examples) but the benefits were very good

    As the 90’s progressed and the Training and competence scheme kicked in there was an immense push to get all salespeople FPC1, 2 & 3 qualified as soon as possible which worked in our case and then business checking ensued. When business was written and sent to head office, it went to the business checking unit in compliance department along with copies of fact find, quotes KFD and Reasons Why letters. As any former tied sales force person will tell you this team quickly got the nick name of biz prevention unit because they went through the paperwork with a fine tooth comb and it never left there to go to new business department until the checkers were happy that all was in order and the biz was fit for purpose. It did get scanned and sent to underwriting but was not allowed to issue until it had been signed off. As we didn’t get paid unless biz issued we were very responsive to comply with their wishes regardless of how stupid their some of their requests were. So the reasons why letters et all got more and more pages added to them and we all now know the end results.
    However it was all done to protect the company from complaints by making sure the business was suitable.

    This regime was followed by regular 1 to 1 meetings with sales or branch manager where ongoing training needs were identified (CPD by any other name but 15 years ahead of its time) and action plans put in place for achieving an agreed outcome. This did help give more depth and knowledge to the sales force.

    The compliance department and training department were jointly responsible for ensuring the company’s T & C requirements and compliance systems were up to the regulators standard and not once in all the years (89-2002) did my company get fined by the regulator, have any sanctions placed against it or have its sales force taken off the road to be retrained.

    It was all going well and I can say that I would probably still be there had they not made us redundant in Sept 2002. The main reason for it was that T & C costs & Compliance costs had been spiralling out of control and it not going to get any better. They simply could not make a profit. Apparently it had been costing £1.48 to put each £1 of new business on the books for more than 3 years and it was not sustainable to have a well trained and compliant sales force doing very good quality business.

    The costs involved now are a lot more than then and if they could not profitably run a successful sales force then it simply would not be possible to do so now.

    That is a real shame as there were thousands of very good tied sales people doing great jobs for those that we now have horribly named “mass market”. Small pension premiums were better for the clients than nothing, we 10 -18 year savings plans for children’s future, £5 or £10pm term assurance, PHI etc etc. They may not have been the cheapest available but clients got ongoing service and had something in place instead of now where we cannot afford to do this kind of business. It is very, very sad but an unfortunate fact of life.

    As ever just my own humble opinion but I am sure this rings true with a lot of others out there

  3. It is easy to blame the FSA/FCA and those before them, but in the last 10/15 years we have been led down a regulatory “cul de sac”

    There are no options, no side roads, nowhere for them to go, no path for a client to choose for themselves, what is actually best for them, this has in fact already been decided for them by our regulator !

  4. A tied adviser is not an adviser at all, but a product salesman (salesperson = horrible word!). Independent or limited advisers are solution salesmen and advise which product/s the client could use to meet their needs. Provided the client fully understands these differences I can’t see why all can’t be accommodated in financial servcies.

  5. Having once been part of a large well known tied salesforce and having also been an independent company director/ adviser for the past ten years, I feel I can comment from a position of some understanding if not authority. Many of us in the industry will have fond memories of being part of a tied salesforce at some point during our career. The large insurance companies and the banks often had the resources to offer a reasonable level of initial training. However, the ‘tied advice’ process has one fundamental flaw which cannot be overlooked – if you can only offer advice on your own companies products/plans how can you advise a client who has existing policies/pensions /investments with other companies? As most clients will already have an array of other companies plans/policies you effectively have to ignore those plans as a tied adviser is not authorised to offer advice on those plans. For this reason the process simply becomes an ‘own product selling’ excercise and could not be decribed as advice.

  6. Nic, its already out there, SJP.

  7. As with most of the commentators above i also started out as part of a tied salesforce. The pro’s are that life companies and banks tended to have a fair amount of money to pump into training schemes that allowed new entrants to enter the advice sector with the support of a national company that would pay them while they trained.
    Just with the housing market, it is important to have people coming in at the bottom in order to have a healthy sector. I fear that the removal of most ‘mass-market’ providers means that no one is training new entrants in any significant numbers. This is obviously bad news for the public who will face a dwindling advice sector as advisers age and retire leaving their clients orphaned.

    Ian Newton has mentioned that the con’s of a tied salesforce are that they, often but not always, don’t receive sufficient training on a broad enough basis to include clients existing arrangements within any recommended course of action. Often even when the advisers knowledge is sufficient to provide advice the provider they are tied to refuses to let them due to compliance issues. With simple products such as term assurance (life only) it’s not an issue as advisers can provide generic advice that is likely to cover the existing policy but even with something slightly more complicated like critical illness recommending on another firms products becomes an issue.

    Despite all the above the real problem with tied salesforces is profitability. The drive, when i was tied anyway, was always to make sure that the salesforce was self sufficient. This has become more and more of an issue of which i’m sure the FCA and the FSA before them have some culpability. The drive to more profitable forced the board to pressurise management which in turn results in individual advisers being forced to hit ever increasing targets. That kind of environment promotes miss-selling.

    A bit of a long winded comment but the gist of it is that until the regulator allows the cost of regulation to come down they are going to continue to see a reduction in the ability for companies to provide advice to the public on an affordable basis. No more mass markets providers and certainly no return of tied salesforces. Costs are strangling the industry, eventually the regulator will have no one to regulate.

    All the above is my humble opinion alone, feel free to disagree.

  8. Nic, thanks for the quote!

    Put yourself in the position of a large insurer – lets hire 10 guys with a salary of ‘X’, add a cost of training of ‘Y’, add the benefits and tax costs of ‘Z’ – that’s your outlay from day one. Most companies will have a good knowledge of their margin per product and will know that sales times margin must be more than X+Y+Z to make a profit. You then have two options: 1. you generate a good quality, high achieving sales force that can sell your current products at a level to make money or, 2. you develop products with higher margins (lover value) to mitigate the risk of losing money. The issue is the guys in option 1 are probably already running thier own business and doing very well!

  9. Nic

    I found your article most interesting. It was also interesting to hear you tell of those who waxed lyrical of being life company salespeople. I hated it.

    When I fell into financial services I too began in direct sales. I was fortunate in being able to strike out several paragraphs in the contract. I was also perhaps fortunate that I had no illusions and didn’t expect to earn anything for at least the first 3 to six months. Much to my surprise I was earning pretty quickly. However I know from the off that many of the products were complete rubbish. Luckily they had some fairly reasonable investment products. I joined on the basis that you can’t be a brain surgeon overnight and you needed to get trained. This organisation (in hindsight) had really excellent training – it must have cost them a fortune. I got on as many courses as they would have me on. However I really hated the ethos and did not appreciate the sales culture.

    Some of my colleagues evidently loved what they were doing and made a good living. But I always regarded them of coming from the Bernie Cornfeld school. (For those too young to remember try Bernie Madoff). The tiers of those earning off others was reminiscent of the old adage – Great fleas have little fleas upon their backs to bite ’em, And little fleas have lesser fleas, and so ad infinitum.
    As my tenure was pre regulation I was able to ensure that my clients got the somewhat better products on offer elsewhere when it came to life assurance for example. Having made arrangements with a friendly broker who was independent. (The term IFAS hadn’t yet been coined).
    I stayed long enough to get a grounding (2 years) and then with great relief left to become independent with a small firm where I stayed until I started on my own.

    I can’t think of anything worse than resurrecting these organisations. And when you said “So cannot life companies go back to the drawing board …” I recoiled in horror.

    One of my first impressions when entering financial services was how awfully these large insurance companies were run and more than 25 years later I haven’t changed my mind. Compared to the large firms I used to deal with in industry. To say that the traditional household name life companies were (and are) inept is flattering them. I am not at all surprised that the public regards them with (deserved) contempt. (Is it any wonder there is no confidence or trust)

    As to the banks – well I’ll leave that unsaid.

  10. Virgin Money launched a tracker at 1%. Probably still 1%, for all I know. Three times the going rate. Not much value there, Nic.

  11. IMO Pros of the Bancassurance model
    – good compliance – if your files weren’t right it cost you money
    – training – level 4 exam sponsorship
    – gave access to life cover to people who weren’t interested in visiting IFA offices for small life assurance policies

    IMO Cons
    – vast numbers of management who couldn’t ‘manage’
    – targets linked to products with high charges and poor performance
    – complaints centred on the adviser not the company
    – high staff turnover

  12. To be viable costs must be controlled – but the cost of compliance rises inexorably every year (to little if any appreciable consumer protection) now consumers are so well protected they can’t buy any products… unless it is online with zero advice and zero protection – as many predicted. Well done the regulators…

    It is exactly the same story with final salary pension schemes – another great story of political fudge and over regulation that killed a great product that worked for millions – only to be replaced with something infinitely superior – NEST.

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