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Outside edge

Behind the headlines of the recent CP121 from the FSA, there is much

to consider. Although most of the initial debate centred on the depth

of life office pockets and the likely rush to buy/secure distribution

(delete according to your view), there is a whole raft of other

issues that require consideration.

I am particularly interested in the impact of the proposals on the

fund management sector – especially on those middle-ranking companies

which are unlikely to have the cash or desire to get involved in a

bidding war for distribution.

Consider the scenario that the major life offices have a major panic

and recognise that their current business model is based around a

very weak distribution system. I doubt if it is news to point out

that hundreds of broker consultants traipsing around the country

flogging with-profits bonds through mediocre IFAs is not a

sustainable basis for a business.

However, that is not to say that the status quo may not continue.

After all, it seems that on a multi-tie basis, providers may be able

to pay quite exorbitant levels of commission in addition to

feathering the nests of their “salesforce”.

In such a scenario, the shrinkage of the IFA market may be at the

upper end of expectations and we could see as many as 90 per cent

going to the wall or seeking the sanctuary of a multi-tie. Where

would this leave the distribution opportunities for the asset

management groups? Consider first of all the mainstream,

middle-of-the-road asset managers with no great areas of speciality.

As today, they would be left with three possible lines, namely

direct, IFA or multi tied.

The obvious worry is that mainstream asset managers would be largely

excluded from the multi-tied sector as they have no access to soft

policyholder capital. This is a very key point as the direct

competitors of this part of the fund management market – the life

offices offering with-profits and managed funds – have access to

rather large sums of said cash for which no one is really accountable

should things go wrong.

Consider the early experience of stakeholder if further evidence is required.

In an IFA market, in which 90 per cent of individuals have morphed

into multi-tied authorised financial advisers, I would expect asset

management groups to experience a slump in business of at least 40

per cent.

The outlook for niche and very big fund groups is likely to be

considerably more app-ealing – the niche players will be sought as

multi-ties and will continue to remain attractive to the IFA sector

while the very big groups will get by on the basis of their brand

presence.

Should all this hypothesising emerge as reality, what will be the

impact on consumers in terms of their choice and likely returns? It

is here I fear the worst. The last thing inv-estors need is a

mass-market investment industry dominated by insurers in which the

returns are delivered via the rickshaw of with-profits or the

questionable talents of life office investment divisions.

Furthermore, in a multi-tied environment, investor choice may be

artificially restricted to generate the greatest margin for the

product providers. One imagines that a narrowing of consumer

flexibility was not a major driver behind CP121.

No one knows for sure who will be the winners and losers although I

cannot help thinking the balance of power is swinging further away

from providers. Maybe this will be the first wake-up call that is not

greeted with the usual slap of the snooze button.

David Ferguson is a director of product design and marketing

consultancy, the abacus david@the-abacus.com

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