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The price of advice

In his second article on depolarisation, The Strategy Works managing director Michael Herson considers why it costs too much to give advice and the ticking timebomb that is the aging adviser population

IFAs have to offer their clients a fee or commission option before they start a meeting but this in itself could encourage advisers to target the financially better off consumers as the cost of advice may be offputting for the majority.

Standard Life managing director (marketing) Simon Douglas feels this point is fundamental. He says: “It costs too much to give advice and that is why there are so many people without cover. It is the cost of advice that excludes people from our products.”

Indeed, left to their own devices, IFAs are almost certain to follow the money and preach to the converted. No provider is spending any serious marketing budget to engage new consumers – a derisory 3.3m was spent by the industry in 2003.

The only serious attempt to date to reach new consumers – stakeholder pensions – has (so far) failed to make any serious impact although a new media campaign is under way. Douglas is dismissive of stakeholder pensions. He says: “Nobody in that group can access the products and it reflects a lack of understanding of market demands.”

Prudential director of distribution Andy Briggs says: “Until it becomes economically viable to sell a product, there will be barriers to this market.”

According to a July 2005 survey from Docucorp: “Most people would rather read the back of a cereal packet than a letter from an insurance company.”

The fact remains that it is a supply-led product sale and IFAs are better than other channels at identifying higher-net-worth people and arousing their interest to meet a need.

Bankhall marketing director Richard Howells says: “Financial products have to be sold and IFAs will sell to those people who more readily see value in that kind of service.”

But where is the incentive for IFAs to step up the sales process a couple of gears?

Legal & General head of planning and strategy John Maud says: “Charges have come down, commission rates have come down and by and large it is harder to make your living as an adviser.”

Providers continue to take opportunities to save costs and Standard Life is not alone in its decision to service some parts of the IFA market with phone-based as opposed to field-based advice.

But there is another ticking timebomb to factor into the equation for the future of the industry. IFA recruitment has largely stemmed from the disbanded salesforces shed by providers after the late 1980s but this has led to the aging problem, with an average IFA age of 53, according to Standard Life.

New blood really needs to be attracted into the profession and Prudential has genuine concerns about the ability of the IFA market to rejuvenate and advocates setting up of a financial adviser academy, where graduates could become professionally qualified to give financial advice.

On the plus side, there are new opportunities emerging such as the new style of corporate pensions schemes which are fast replacing the out-of-fashion defined-benefit schemes.

Douglas reports that corporate pensions make up 40 per cent of Standard Life’s new business. He says: “We do very well in the group pension market because defined-benefit schemes did not really involve companies like us much at all. They tend to be self-administered so they are all setting up money-purchase schemes instead where we have got core competence and we will then run that pension scheme.”

Like other companies, Standard Life recognises the value of emerging firms of employee benefit consultants who will often have an influencing hand in introducing these concepts to companies.

Large numbers of staff can be persuaded to join because of the employer-matched contributions, without the need for costly individual advice. This trend is endorsed by Friends Provident marketing director Graham Harvey, who reports that over half of Friends’ business is now in corporate pensions.

Prudential also sees this as a fast-developing route to market and employee benefit consultants account for 30 per cent of its new business.

Of course, the growing popularity of Sipps is also a significant development, where the provider acts as more of a platform. Friends believes Sipps will radically change pension portfolios and is working with Watson Wyatt to develop its strategy.

Formal alliances are being created. Legal & General has bought a 25 per cent share in Cofunds and Standard Life has teamed up with Fidelity FundsNetwork. This move towards open architecture provides access to funds right across the marketplace and gives IFAs a genuine opportunity to work with their clients and encourage the self-investment approach.

Prudential is planning to launch a Sipp in 2006. Briggs says: “The Sipp market may prove to be a lucrative niche but it will not help solve the savings gap for the mass market.”

None of the providers is particularly optimistic about the prospects for the newer sales channels, that is, phone and the internet. Standard Life regards the web as a source of information, not a channel for purchase, and Friends sees its consumer website just as a vehicle for servicing existing policies and not for attracting new business.

Only simple products, such as term insurance, may prove the exception to the rule, where Legal & General does generate some online revenue and also has a joint marketing arrangement through Sainsburys.

But the general body of opinion is that these are not products which lend themselves to being white-labelled at the supermarket checkout like motor or household contents insurance.

In general, the industry seems to be looking forward to A-Day on April 6, 2006, when the 1 per cent cap on annual charges grows to 1.5 per cent, as a means to reverse the low interest in pensions, and the present cap of 105,000 on pensionable salary will be lifted. Howells is enthusiastic about a more benign tax regime. He says: “A-Day offers the ability to put residential and commercial property within a Sipp and get tax relief. That is an enormous opportunity.”

Briggs is also positive, noting: “It will create opportunities to make pensions attractive to mainstream consumers again and it will put charges up to a level that can sustain advice.”

But something dramatic still needs to be done to bring new sheep into the fold. Statistics show a fall of 5.3 per cent in the proportion of UK households with personal pensions in the 10 years between 1992 and 2002.

Paradoxically, household expenditure on personal pensions rose by 149.6 per cent in the same period. Household coverage has declined both for life insurance and personal pensions while expenditure over the period by those households covered by these products has been rising – a clear signal that the industry has been preaching to the converted since polarisation took effect in 1988.

The industry awaits the findings of the Pensions Commission, due to report this month. Most observers believe compulsion is an unlikely outcome as it is a political hot potato. But this issue is bigger than politics and goes to the very economic roots of human nature. Prudential has expressed its views to the commission chief Adair Turner and the consensus is that worksite pensions represent a huge opportunity to get more people to invest in pensions.

In addition, Briggs feels that allowing people to use the value of their property to produce an income in retirement could be a key way to enable many to set up retirement finances.

Of course, the industry needed to be regulated and the 1988 and 1995 legislation was well meaning and intended to protect the public against misselling and afford more consumer choice.

But the fundamental problem remains because no one seems to have grasped the impact of social change on this market – the coming of age of the baby boom generation, the rise of consumerism funded by low-cost debt contributing to an enormous savings gap.

Even very desirable products for consumers such as mobile phones and Sky TV have required years of heavy marketing investment to get them to the high penetration levels they now enjoy.

Products such as life insurance and pensions, which have limited or no appeal to the majority, require more than marketing, they require education from an early age.

Bankhall believes that the Government has a responsibility to educate consumers and Friends also advocates better education within schools.

The UK has had a tremendous history compared with other major Western economies in terms of the percentage of financial assets residing within life insurance and pensions.

At the end of 2003, it was 54 per cent, three times that of the US and nearly twice that of Japan.

It would be a pity and potentially costly for the Government if, over the next generation, that trend was reversed by something as fundamental as not stimulating market forces, that is, by simplifying the sales channels and incentivising the route to market.

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