Much of the debate about Sandler, CP121 and Pickering has been around the immediate impact of lower charges, multi-ties, tiers of advice, product design and to what extent this will close the savings gap.
This analysis takes a longer-term perspective – which is essential for IFAs in deciding how to react in the short term. Strategic decisions taken over the next 12 months are critical – and there will be no second chances.
Assuming that the proposals are implemented, how will the industry have transformed in three to five years? The easy predictions are for consolidation, fewer and bigger players and product commoditisation but how will the market shape up and what will profitable IFAs look like?
If the Sandler proposals are implemented and the high-street players decide to play, then the market will split and Sandler will have provided IFAs with their greatest opportunity in years. The top chart above on the right shows how the market will change.
The chart starts at the bottom with the Financial Services Act (1986) which introduced tied and independent advice.
Margin pressures, particularly those arising from stakeholder pensions, made the traditional direct salesforces unviable and shifted IFAs toward corporate and higher-value personal business.
The effect of the 1 per cent charging cap across all main product markets (because the Sandler products will have competitive impact for their non-Sandler counterparts) will be to complete the transformation of the tied direct-selling businesses (banks, insurers etc) into call centre, internet and branch-based “product transactors”.
This will be a high-volume, low-value market dominated by fewer than six major players – ex-building societies being particularly well placed with their core skills of collecting small sums from thousands of individuals. The assumption is that this can be achieved under 1 per cent, although the major players are currently divided.
It is clear that those who enter the fray will have to operate on a lowest-cost strategy to deliver profit. It is well known that in these circumstances there can only be one final winner so the stakes are high and only the biggest operators with big brands can play with confidence.
The top right of the chart will deal with the 30 per cent of adults with around 60 per cent of the investment market buying power – plus most of the corporate business.
This is a high-value, low-volume model and profit will be derived from “added value” as opposed to economies of scale.
This part of the market will be dominated by IFAs because for anyone who wants comprehensive advice there will be nowhere else to go.
The high street will be a no-frills product shifting service. The advice market will be about serious advice and the long term. It is true that some players could and will operate in both parts of the market but IFAs have always seen off such competition in the past and, with some important changes, will do so again.
How will IFAs need to change to take advantage of this opportunity and deal effectively with the menu of charges? The second chart below on the left summarises the challenge.
The extent of transformation is significant – along with the timescale. Some existing business will be out of the market in two years because they do not have the capacity to change and are too far to the left of the chart. However, in a dynamic market where demand and buying power for advice is high and rising (inheritance monies, ageing population, reduction in Government support for health, education and older age), new businesses will emerge operating to the new model on the right.
Importantly, this chart shows that, this time, change is for real and cannot be ignored – because the old model will not work. It cannot be tweaked, it has to be replaced.
The two-year timescale is driven by the expected arrival of the menu in early 2004 and the Sandler products in 2005. Strategic decisions taken now must begin to bite when the competition really hots up.
In essence, IFAs have two years to strengthen their position, instigate change, secure the advice market and keep well clear of the battle on the high street.