Although I am sure most industry observers would agree that we are in the midst of a period of intense structural change, largely fuelled by regulatory and economic circumstance, I am less sure that there is consensus on the ultimate winners and losers.
Nowhere is the debate more divided than across the life office/IFA divide, a gulf that may be forced to narrow as life office ownership of IFA equity continues to increase.
Although the financial and economic issues are certainly worthy of consideration, I am also interested in some of the “softer” issues such as mutual trust and respect, for these will ultimately have a significant role to play in the emerging financials.
Now I do not think it is unreasonable to surmise that relations between life offices and IFAs are at best fractious. I can imagine a Bush/Blair/Saddam/bin Laden four-ball more than I can the alignment of life office executives and IFAs in matters of culture and management.
There is a great deal of contempt on both sides. IFAs dislike life offices as they tend to overpromise and underdeliver on product performance and generally have laughable standards of administration that impact heavily on IFAs' bottom line. Life offices often have contempt for IFAs' weak business practices and lack of technical knowledge. This latter point is particularly ironic as greater knowledge would certainly result in less business for the life sector.
My strong suspicion is that the real problems arise as both sides know that the IFA is adding greater value but often does not have the capital and/or ability to run a proper business and therefore relies on the life office to provide artificial, non-commercial support.
Putting aside consumerist issues, this may all be fine and well in the short-term, although it is hardly a blueprint for an efficient industry.
So what is happening now? Life offices and IFAs are falling into bed together because life offices (or is that policyholders?) are able to provide stability/development capital to IFAs and the IFAs will provide something in return.
This is best illustrated by considering the groups of life offices who have colluded to buy into a number of IFA businesses, with one of the offices emerging as the “lead” on each deal. Given control will continue to lie with the IFA management, it seems that this is just an attempt to prop up a distribution channel in the hope that it will feel obliged to drive business toward the protagonists.
If it works, great. If it does not, who exactly loses out? I strongly believe that it will not work, as many of these IFA businesses are weak for a reason, despite easy access to life office capital for years.
I take rather more comfort from the situations where a provider has acquired 100 per cent of an IFA business. At the very least this is a firm statement of belief in the value of the IFA sector rather than a weak short-term bid to pacify shareholders.
In any event, it is clear that life offices have begun to act on the long-held belief that distribution is king. While commendable, if somewhat tardy, it does leave the sector confronting some very deep self-perceptions.
Ignoring the protection market, it is easy to conclude that the business represents little more than a regulatory license and a (weak) balance sheet. And a whole mess of a legacy back office. The client-added value is at best negligible. Incidentally, the situation is more or less mirrored in the protection market with reinsurers taking the asset manager role.
I am nervous of concluding that a bolt-on distribution function will necessarily solve the somewhat deeper problems. If the end-game for the mass market is a bunch of life office controlled distributors competing against the high-street banks I know which my money is on – the banks.
David Ferguson is a director at The Abacus