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Open doors to closed books

Recent research by Ernst & Young has identified that there is over £250bn of assets in closed funds.

The reduction in number of providers is startling. Open books have declined by over 70 per cent in the last eight years – 74 providers were open for business in 1999 and this total reduced to only 21 by last year.

Customer retention has become the number one issue for most life offices, with significant amounts of value evaporating through product recycling on a daily basis.

Protecting value is a major part of many conversations that I have with insurers. One point is that recycling can be in the client’s interests and advisers can be moving business as a result of strict adherence to their regulatory responsibility, not churning.

Last May, the FSA, in its review of post-sale with-profits communication, placed an obligation on all advisers to revisit all such plans to review their ongoing suitability regardless of whether they were the original selling agent.

Several organisations, notably Aegon, Clerical Medical and FundsNetwork, have all launched services to help advisers with this, not just for their own contracts but also those from other insurers.

With the Treasury having confirmed changes to capital gains tax, it is obvious that advisers need to prepare for another round of detailed policy reviews. It is probably wise to wait until the final wording of the Finance Act before committing to specific advice but it is hard to see how any client with a bond product should not have some sort of review conducted.

It is important to be clear. The need is to review the ongoing suitability of any investment product in the light of the changes in the tax regime and the client’s current needs and expectations, not an excuse for a wholesale surrender of bond products.

What is needed is case by case analysis, not a broadbrush approach.

This is an obvious area to employ software. No one has shown me such a solution yet but my market intelligence tells me that several are being built.

There will be cases where the existing investment remains the right answer but there will also be situations where the right thing to do is change the wrapper. It is in this latter scenario that closed books have their Achilles heel.

Where the right advice is to move funds to vehicles that, in the light of tax changes are now more attractive, open book providers can at least choose to set a defensive strategy and offer preferential terms to customers who are redeeming existing investments into other products from their group. Such offers could potentially include options to reward persistency in the future.

The closed book providers, on the other hand, have no such options. Changes in the tax rules combined with FSA requirements for advisers to review the ongoing suitability of with-profits business make it almost inevitable that these companies will now see a significant deterioration in persistency.

Many closed offices, faced with advisers who are carrying out reviews for clients, make it hard for the IFA to get the necessary information. This demonstrates not only a fundamental lack of understanding of the way that advisers work but also of the evolution of the market.

Ironically, if the investment is performing well, one of the best strategies for a closed book provider is to make it as easy as possible for the adviser to get information on the product. The online valuation systems that so many open book insurers have put in place to provide valuations to advisers’ client management systems are the focal point at which the adviser will be aggregating details of a client’s wealth.

As the market evolves to an increasingly service-based model, catalysed in no small part by the RDR, advisers are taking an entirely different approach to the servicing of legacy contracts.

In the past, if a provider made it difficult for an adviser to obtain information, this might have succeeded as a barrier to further analysis of the investment but now firms see it as essential to have the ability to report regularly on the performance of all assets held by clients.

I am coming across increasing number of advisers who recognise that in a post-RDR environment, where they are required to be entirely transparent over their costs to the consumer, if a provider costs the adviser firm more money to deal with, they may have to pass those costs on to the consumer.

Many firms are already considering multi-layered charging to clients based on the quality of service from insurers.

Where the provider has invested to supply a seamless electronic service to provide information and services to advisers, there will be one level of charges to clients.

For providers with fewer streamlined processes, the client will pay a higher cost for advice and for those insurers that are still paper-based, the customer will face a further level of charges.

In practice, this will translate to advisers giving consumers the option to choose how much to pay based on the provider’s level of service. It is not difficult to work out the impact on inefficient life offices or fund managers.

When advisers are frequently reviewing clients’ options, provided their performance warrants the retention of the asset, closed-book providers need to make it as easy as possible for advisers to report on investment performance. Putting barriers in their way opens the door to discussions about moving to more efficient providers.

The regulatory environment precludes advisers moving assets where it is not in the client’s interests. However, with the RDR caus-ing the cost of inefficiency to be passed on to consumers, closed life offices which create barriers to services are only increasing the likelihood of money leaving them as well as breaching TCF rules on post-sale barriers.

It is time for such companies to take a fresh look at their retention strategies and embrace the move to service-based advice.

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