The news just before Christmas of Skandia's proposed acquisition of Bankhall, via an unbundling of Lynx, is yet another roll of the dice in the distribution stakes.
The deal is an attractive one for both Skandia and Bankhall. Skandia gains ownership of a significant IFA services business and the management. That it can do so without having to worry about the “better than best” restrictions for the vast majority of the firms involved, given the directly authorised status of 85 per cent of firms involved, must make this very attractive.
Even if, as is increasingly rumoured, we may see some concession on this restriction to IFA ownership, not to have to worry about it must be a considerable sweetener.
There are good reasons why product providers are keen to take equity positions with IFA businesses. Even if the spectre of multi-ties were not making everyone feel uncomfortable about their future share of distribution, there is a strong need for providers to get capital into the distribution channel.
The IFA market is, for the most part, significantly undercapitalised and a lack of cash is hindering advisers' ability to make significant investments in their businesses, not least in technology.
It is important for all providers with a significant interest in the IFA channel that ways are found to relieve this stress factor.
Provider profitability over the coming years will be significantly affected by the ability to move IFAs to electronic trading and anything which relieves the capital barrier is a good thing for the market.
It is important that getting capital into distribution does not lead to a repeat of the late 80s' debacle when financial institutions invested heavily in estate agents, only for many of them to be bought back by their consequently enriched managements a few years later for a fraction of the prices.
It is encouraging to see Skandia locking in and offering incentives to the existing management.
Although it is, of course, adamant that this investment is made as a sign of the company's commitment to the future of IFA distribution, Skandia does, of course, get a significant insurance policy against multi-ties.
Like any office that is 100 per cent reliant on IFA distribution, there must have been a few sleepless nights pondering how to secure a significant chunk of the new multi-tie distribution if the playing field should change.
It is something of a sign of the times that the Bankhall business that had looked so appropriate within an IT company just 18 months ago has recently looked so out of place within the same environment, given the decline in the technology sector.
From an industry technology perspective, one of the key questions must be how does this affect IFA Engine? Suddenly, becoming part of an 86 per cent subsidiary of a major product provider will not be without its challenges for the fledgling portal.
There are a number of issues that will require significant management. There will be a need to allay fears among other life offices that their products may become a lesser priority than those of the parent office.
Equally, it will be essential to demonstrate Chinese walls between portal and parent. Bringing a new product to market now requires notifying the portals well in advance of your intention and the shape of the product as some specialist development may be necessary. Life offices will want to know their strategic plans and ambitions will remain confidential during such development phases.
The other portals may become nervous of sharing information on future developments with Skandia. These are not issues that cannot be properly addressed but the extent of such challenges should not be underestimated.
Speaking to Skandia group marketing director Bill West on the day the deal was announced, I got the impression that the whole scope of IFA Engine may be significantly expanded, identifying that “What is really needed for the IFA community is a technology platform that can take care of all their needs, a truly integrated solution capable of dealing with quotations, new business, commission reconciliation, back-office functions and links to research systems such as Aequos. We have been using our systems in that way as a provider for many years. We need to bring the same benefits to IFAs.”
A number of portals are looking to deliver such solutions. Interestingly, West also suggested this may be achieved by adapting existing components rather than building from scratch.
It may well be that IFA Engine could become a major customer for some of the technology providers in the market while at the same time competing with them for core customers.
What has happened with this deal is that, due to supply and demand, the price of anyone with a significant chunk of distribution has probably just gone up dramatically.
It has also been shown that ownership of other unsuitable assets is not a barrier when they can be bought out by an existing management.
It is hard to imagine that 2002 will not be even more turbulent than 2001 and it is almost certainly a fact that whoever you are, no matter how big, if your organisation has a significant chunk of distribution leverage, particularly with a technology angle, someone somewhere probably spent the Christmas break running the slide-rule over you as a potential acquisition.
Ian McKenna is a consultant and director of the Financial Technology Research Centre, which works for a wide range of industry organisations, life offices and technology companies, including Microsoft, and The Exchange.He can be contactedby email at firstname.lastname@example.org
Tel: 020 7863 0863