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Yawning gap in IFAs&#39 expectations

Will unleashing the dogs work for the Government&#39s stakeholder plans? Do IFAs view this new market as an opportunity to introduce financial planning to the masses or just another shaggy dog story?

It is difficult to get an overall view about how they are approaching the market but here are the views of some DBS members.

Stakeholder: the opportunity

There is no doubt IFAs see stakeholder as a chance to get more involved in a huge corporate market. Figures from Legal & General show there are upwards of 424,000 firms in the UK, employing between five and 49 people, who do not currently offer their staff access to a pension scheme.

A recent Financial Times article discussed how buying investments, Isas and mortgages through employers could become the norm over the next few years. IFAs are tipped to provide much of this advice because of their ability to give objective guidance and access to the whole market.

Using the workplace to sell financial services is known as worksite marketing. Stakeholder could be the key that unlocks opportunities for IFAs to get involved in full financial planning for employees and the firm they work for.

Alec Cameron of Ian Starkey & Associates believes stakeholder pensions present a tremendous opportunity. He says: “It gives us a discussion point that cannot be ignored. Initially, we are running seminars to educate employers and make them aware of their duties and obligations.”

London-based Michael Lockyer launched pensionsbusiness.com at the end of last year offering employers a choice of stakeholder pensions online. He believes low-cost distribution is key.

Lockyer says: “Given the sheer scale of the stakeholder market and the fact that margins are so thin, it was clear to me at an early stage that the internet as a distribution channel would become a major trend in the industry.”

David Gough of Pen-Life Associates agrees that technology will be an invaluable tool in reducing the costs associated with each transaction. Gough says: “Stakeholder will be the catalyst to a general reduction in profit margins across most products and, in my view, compulsion to contribute is just around the corner.”

Cameron also believes compulsion is on the cards. He comments: “Stakeholder aims to reduce the onus of the state&#39s pension commitments but there is a danger that the schemes set up just to conform with the rules will be empty boxes with no contributions being made by employers or employees. When the Government discovers this during its review of stakeholder in October, action is bound to follow. The burden of pensions for the state is not going to go away. Compulsion is the likely result.”

Stakeholder: a different view

Although some IFAs see stakeholder as a huge opportunity, others do not view it in quite the same light.

Jim Fleming of Fleming Asset Management decided not to get involved in stakeholder after hearing the opinions of a number of his corporate clients. He found that many employers already have pension schemes in place for selected employees and do not want to make contributions for staff who do not figure in the long-term plans of the business.

Fleming believes the stakeholder rules have been misinterpreted by employers who think contributions for all employees are mandatory, when a scheme only needs to be nominated.

With a client base consisting of mainly high-net-worth clients, Fleming&#39s focus is very much on providing value for money. He says: “With stakeholder, the Government is focusing all its energy on price, excluding invaluable advice. My clients are happy to pay me commission or fees as they see value in the advice I give.”

Fleming says selling a loss-leading product such as stakeholder would not happen in any other industry. He says: “Wimpey Homes would not contemplate building a new housing estate if they knew they would not see a return for at least 10 years. As a business deal, it would not even be considered but insurance companies are fighting to get a piece of this market. It is crazy.”

Gough has also considered this aspect of stakeholder but he says we need to ask why bancassurers are getting involved in this market. He says: “They are not known for waiting a long time to make a profit. Could it be that by gaining access to the business owner, they see a chance to gain influence that leads to control?”

It seems clear that IFAs see opportunities in the corporate market and technology will be vital in reducing the cost of advice. As for the personal market, Gough seems to sum up views. He says: “Stakeholder is not viable on a personal level unless a fee is charged for advice.”

Financial services in the UK are often compared with experiences in the US and Australia. David recently visited the US to find out more and was impressed with what he saw. “My only major concern is with follow-up service from the providers. The US has a great reputation for customer service but, although it looks good on the surface, the support available was wafer-thin,” he says.

The IFAs contacted see stakeholder as an exciting prospect and are keen to develop corporate prospects. Sadly though, problems are foreseen with the transfer of the burden of pension provision to employers. It is felt that many will just provide empty shells.

On the personal side, it would appear that those who most need advice on pension provision will not consider the expense of paying a fee. IFAs seem prepared to offer advice but need to make enough to cover their expenses.

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