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Systems for success

Advisers need to turn to technology to build a sustainable way of business

The IFA industry is grappling with its identity and in particular the roles of key players and the operating model is broken.

That is the message coming from the likes of the FSA’s Sir Callum McCarthy. There are many in the industry calling for the end of the commission gravy train or merry-go-round.

Yet initial commission deals continue to come forth to attract not only new business but also to protect existing products from being churned or switched away through its application to internal transfers.

The latter appears to be driven by the growing recognition that measuring a business by its new business figures alone gives a false reading. It is net new business figures, accounting for lost business as well, that counts. Poor persistency figures*, like 48 per cent after four years, make it evident that high initial commission on what are supposed to be long-term products are not sustainable, given that life office payback periods often extend well beyond this period. In other words, a firm cannot afford to ignore lost business but equally cannot afford to pay commission to encourage retention.

Shareholders and City analysts will no doubt be questioning the impact of a firm continuing to operate on this model so new mechanisms for obtaining and retaining business are needed.

The churning debate seems confused by lack of definition. If churning is defined as the replacement of a product to gain more or better commission without regard to product or service, then this is bad.

Switching, on the other hand, if defined as the replacement of a product to gain better product features and/or service, is healthy. Through competition, it promotes the continued development of new and existing products to meet market demands and also excellent service provision to engender long-term customer relationships.

Unfortunately, it seems many IFAs are too dependent on high levels of initial commission. Not only does it perpetuate the continued commission offerings but it is also short-sighted as it limits the potential value of their business by creating little embedded value.

Providers and advisers need to work together at breaking this cycle by embracing technology that facilitates a new model. Through technology, cost can be taken out of the supply chain and efficiency between intermediaries and providers can be massively improved.

It allows the launching of new products that help with the movement from initial commission/transactional model to a renewal commission/service provision model. Ultimately, it is the ease with which intermediaries and providers can jointly work in the market that will be key to achieving a sustainable model.

Furthermore, there are calls for the regulator to reward, through lighter- touch regulation, those that can robustly demonstrate a well-run business that safeguards customers – technology can help provide that infrastructure.

It is unfair to criticise IFAs for lack of use of technology, as the industry has not made it easy for them. There is a plethora of non-integrated systems supplied by a “cottage industry”.

IFAs need a single back-office system integrated with providers and front-end research tools to allow a service provision model – the holy grail of straight- through processing.

We believe there need to be multiple layers of aggregation:

Portfolio level – on intermediaries’ desktops.

Client view – multiple products supplied by multiple providers.

Provider level – client view of products within the provider.

Product level – multiple investment/funds under a product wrapper.

This is more than can be provided under the standard wrap proposition.

Our view is that we need to look where there is critical mass and utilise existing systems to deliver incre-mental functionality and capability for straight- through processing. This, in turn. will help deliver a sustainable model for those advisers and providers who embrace it.* Source: Financial Services Authority 2005 Survey of the Persistency of Life and Pensions policies. Persistency after four years for regular premium personal pensions sold by independent financial advisers.

Graham Coxell is business and commercial development director at Capita Financial Services


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