To me, the word gamble throws up sometimes glamorous but always exciting connotations – Monte Carlo, the Derby, champagne, dinner suits and now, it seems, a 1 per cent world for mass-market investment products. Hmmm. Spot the odd one out?
I can get quite up for the first four of these and in fact I am sure that many of our industry have done in the past (usually at policyholder expense but let's not worry about that for now).
The one I struggle with is the 1 per cent world for investment products.
We currently have a situation in the IFA market where actively managed funds can be sold within a reduction in yield of about 1.3 per cent.
Given the generally dismal performance of these funds, it is easy to argue that one could strip out 10 basis points and revert to passive funds – after all, how many decent life company funds can anyone name?
That leaves an average annual charge of just 1.2 per cent. There is surely a general acceptance that this industry is at least 20 per cent too flabby? Et voila. No risk. By the way, if you don't agree with the 20 per cent flabby, I hope you are either close to retirement or from a wealthy family because you are not living in the real world.
Now this model is slightly simplistic but does suggest that maybe there is just too much hysteria and not enough consideration of the issues – certainly for comp-anies with UK parentage and limitations.
For those in or with access to less developed markets there is a capital issue – should they rush off and create a similar problem somewhere else or should they build a sustainable business in the UK. Not my call of course but one cannot help feel that the UK's relatively low savings ratio and a willing Government may provide a very big opportunity.
My advice would be to wait for the gigantic carrot called compulsion or some other kind of state intervention. For once see the bigger picture and think strategically rather than small-mindedly, no matter the temptation.
The demographic and financial realities suggest that compulsion will come. All very well you may say. Why did the Government not do the easy thing and introduce compulsion alongside stakeholder pensions?
Easy! No Government, or indeed any self-respecting organisation, can be seen to tell people to invest their savings into a cumbersome, inefficient and fundamentally weak industry. Harsh? I think not. Until the life industry, in particular, begins to look beyond the end of its nose and consider its role in society, progress will not be made. Once (if?) it does, the opportunities will become clear.
Life offices are not in the investment market – they are in the protection and mass savings market and they should curb their aspirations accordingly.
That means they are not capable of investing money as well as “proper” asset managers, they do not have a salesforce competent in the product and they will never control the key distribution channel, no matter how much money is flung around.
So is the 1 per cent world a big bad gamble? When placed alongside pension misselling, endowment misselling, high-income bond misselling, with-profits bond misselling (not- ice the trend?) I think not.
What the “regime” implies is one of a long-term customer value proposition and not one of the short-term sale. It suggests that greater efficiency should become vital rather than a by-product of volume.
More than anything else, providers must appreciate that this is not their call. If you cannot do it, shut up shop because someone else will. That is your real gamble – not whether or not you can call the Government's bluff.
Not very glamorous, but there you have it.
David Ferguson is a director of The Abacus