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The suite stakes are high

The stakeholder providers lobbying for an increased charge cap must really be kicking themselves for the way they responded to the launch of stakeholder pensions in 2001.

In those heady days of the bull market, the pitch to the IFA market was that 1 per cent was enough to cover the costs of personalised advice, deliver high-quality investment opt-ions, cover admin expenses and still break even.

All that was needed was significant market share, some capital to cover business strain and good persistency and you would have a thriving stakeholder business on your hands.

However, almost in a blink of an eye, the whole landscape has changed. The capital res-erves that had encouraged providers to believe they could make 1 per cent work started to vanish just as Ron Sandler started to talk up the possibility of applying the 1 per cent principle to all investment products. All of a sudden, everyone is panicking and lobbying for an increase in the cap.

Although the Treasury has hinted that it is thinking about a higher cap, is this really necessary?

If it was envisaged that these products would be sold with full personalised advice, then there would be a clear need for a higher cap. However, the Sandler review foresaw simplified or DIY advice in this market, driven essentially by direct rather than intermediated distribution, with cheap investment options provided by trackers rather than actively managed funds.

Provided that stakeholder products reflect these considerations and adverse exposure to low-premium cases is avoided, it is possible to visualise a successful business model emerging. The only issue is that this would make it incredibly difficult for IFAs to participate in this market unless investors are prepared to pay fees to cover the inevitable commission shortfall.

However, IFAs should not feel dispirited. Sandler&#39s vision of life after depolarisation is that IFAs would not necessarily use stakeholder products. Instead, they would recommend products with extra loadings for commission and/or fees and which provide inv-estors with deluxe product features that give a value-added alternative to the stakeholder suite. All that is required are market segments which are adequately differentiated.

The only risk is that pro-viders make the same mistake they made with stakeholder and deliver deluxe stakeholder products that cost more than the product charges can support. If they do this again and stakeholder product expenses are allowed to exceed the charge base of a product, the quality of stakeholder products could make it very difficult for IFAs to recommend anything but stakeholder products. This would be a disaster for the IFA sector, given the low level at which commission could settle.

The way providers react is crucial. If they pursue the stakeholder market by competing on product features, this will not only escalate expenses and eat up what margin could be achieved in the stakeholder sector but also squeeze the opportunity to sell alternative added-value products that deliver higher margins.

Although the proposed structure will be set up to allow recommendations outside the stakeholder suite, these would need to be justified. So, as long as stakeholder providers think through their product strategy sensibly and ensure the existence of two adequately differentiated markets, all IFAs need to do is to make sure the products they recommend and the advice they provide really does add value relative to stakeholder products.

With the simplifications to tax regimes anticipated and the hints contained in the Sandler report of the need for more and better investment advice, it should be clear to IFAs where they need to add value.

Those who are positioned to do well will be those who already have, or quickly acq-uire, greater investment expertise to supplement the tax and product advice that has historically dominated the advice provided by IFAs.

Those who do not rise to the challenge run the risk of being left behind to face the harsh financial reality of the new stakeholder suite.

Provided IFAs rise to this challenge and providers do not shoot themselves in the foot again by delivering deluxe but ultimately unprofitable stakeholder products, personalised advice can survive. We can only hold our breath and hope that common sense prevails and that an adequately differentiated non-stakeholder market is allowed to develop.

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