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The lone ranger rides high

A maturing generation of baby boomers means an everincreasing proportion of retirement savings being liquidated and fewer new contributions being invested.

Analysis by Oliver Wyman & Company and UBS Warburg suggests that, contrary to popular perceptions, pension reform will do little to reverse this trend in the UK. Asset managers face a difficult task in growing their assets under management.

Massive falls in equity portfolios since the bursting of the late-1990s bubble have drastically reduced asset managers&#39 fees without reducing their cost bases. This situation will be exacerbated by regulatory caps on management fees.

Consumers who are still willing to invest are placing greater emphasis on solid performance rather than upside potential and are looking to protect themselves via more prudent asset choices and higher guarantees. They are attracted by offerings with a higher fixed-income and money-market content.

Those consumers who are still investing in managed funds are interested in absolute, not relative, performance, since there is no use in outperforming a loss-making benchmark or peer group.

Therefore, asset managers are facing the twin threats of a smaller pool of assets and a more demanding customer base. We see three major survival strategies that they might adopt. First, they might become experts in carrying out mechanical functions such as tracking indices and processing transactions. They would do this in bulk and with maximum efficiency to drive down unit costs.

Second, they might become niche players and manage more exotic asset classes with higher margins such as private equity and hedge funds. Third, they might seek to become mega-producers and generate large quantities of business in order to remain profitable despite high fixed costs.

Among the steps most likely to be taken by successful asset managers would be:

•Becoming independent of insurance or banking parents in order to win business from multiple product suppliers, including former competitors.

•Merging with other managers to achieve scale efficiencies.

•Achieving brand awareness by marketing to professional advisers and retail customers via trade publications and the mass media.

•Exploiting scale and brand value to negotiate terms and forge alliances with multiple distribution partners.

The achievement of the first step has been hindered by the lack of buyers who see asset managers as attractive acquisition prospects, for the very reasons discussed above.

A reorganisation of asset management is likely to be accompanied by a shift in the role of insurers. Instead of providing in-house asset management, insurers are likely to spin off their asset management operations and offer clients a choice of funds from a range of external managers.

Although insurers have offered a choice of in-house funds within product wrappers for many years, few have moved to provide a truly comprehensive range of external funds for such products as personal pensions. This may prove critical if consumers come to demand a range of funds comparable with those offered by fund supermarkets.

Insurers are more likely to offer tax and legal wrappers and provide the link to the IFA networks which most fund managers lack. Insurers would also be able to use their capital and risk-management expertise to add life and health benefits as well as investment guarantees, to satisfy customers&#39 need for protection.

As insurers and fund managers compete to secure a viable share of dwindling retail investment revenues, scale will become key to negotiating favourable terms of trade. Insurers themselves may undergo consolidation in order to secure asset management services at preferential fees.

Changes are not restricted to asset management and insurance. Distribution is also changing. Retail banks are increasingly offering a range of fund managers through alliances with single suppliers – LloydsTSB and Scottish Widows, for example, or Citibank and Fidelity&#39s FundsNetwork.

But depolarisation will allow the banks to tie with multiple providers. This can only serve to accelerate the growth in fund choice and could potentially expand the choice of protection products, investment bonds and pensions on offer.

If banks choose to follow some Continental bancassurers, with more highly trained staff able to provide advice, then they will encroach on the traditional territory of the IFA.

So, faced with a smaller investment market and new competitive threats, IFAs need a strategy to maintain their revenue streams.

Although there has been a switch to selling protection products, this is no panacea. Furthermore, selling some of the newer health and disability products leads to more difficult point-of-sale conversations. Top-performing IFAs will distinguish themselves in three activities:

•Continuing to identify the most appropriate protection and risk products as part of an holistic financial plan.

•Positioning themselves as the foremost distributors of wrap products by offering fund selection advice to consumers faced with the new problem of too much choice.

•Advising on a range of alternative investment classes for more sophisticated investors. These may eventually include private equity and hedge funds.

As IFAs look for the best way to deliver value added advice in the new environment, an interesting response is presenting itself. IFAs may choose to enter tied relationships with only one or a very select group of suppliers for investment business.

To meet client demands, IFAs need to offer a comprehensive fund range offered in appropriate wrappers and with the necessary protection and guarantees. If the changes discussed take place, the IFA will be able to meet these demands via only one or two insurance partners, since insurers&#39 survival also depends on being able to meet these needs.

This pressure on insurers to provide more open architecture means that, in future, tying to suppliers need not equate to losing independence. Consumers value the IFA&#39s independence in the choice of asset manager, which is where the brand power may increasingly reside. The choice of insurer to package the investment product is far less important.

The IFA&#39s cost and time savings in terms of product knowledge, relationship building, trouble shooting and systems integration will help to make the economics of this strategy more attractive.

Does this mean that IFAs should tie or multi-tie to providers for all products? Not necessarily. IFAs need to maintain their ability to look across the whole market for products in which the choice of insurer is critical. They will also wish to maintain enough distance between themselves and the insurers so that they can continue to press for high-quality service and tight pricing. So any tie will need to be flexible and non-binding – more like a panel of one.

These panels of one will see IFAs reward providers which get it right – especially where service standards are concerned. These providers will find themselves getting a disproportionate share of IFAs&#39 wrapper business.

Inevitably, only a few providers will succeed in this new environment and IFAs will have an influential part to play in selecting the survivors.


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