The impending commission ban and the regulator’s clampdown on providers’ payments to nationals and networks have forced life companies and platforms to develop new strategies to control distribution.
Historically, product providers have sought to influence distribution by owning adviser networks, but this model has come under both regulatory and commercial pressure over the past few years.
On the regulatory side, the retail distribution review’s (RDR) commission ban is the biggest blow to providers’ grip on distribution, but the Financial Services Authority’s (FSA) recent letter to 24 life company and network bosses warning them over distribution deals signalled further restrictions on provider payments. Marketing allowances and paid-for training days are firmly on the FSA’s radar.
Some of the biggest nationals and networks are partially owned by providers, including Positive Solutions, owned by Aegon; Sesame Bankhall Group, owned by Friends Life; Openwork, owned by Zurich; and Tenet, whose shareholders include Aegon, Aviva, Friends Life and Standard Life.
However, from a commercial perspective, stakes in networks have begun to look more risky than profitable as rising professional indemnity insurance costs and claims liabilities outweigh declining profits and in some cases heavy losses.
Relationships at a crossroads
Matt Timmins (pictured), managing director of support services provider SimplyBiz, in which Standard Life has a 10% stake, said providers were at crossroads in terms of their relationships with advice firms.
‘Because of adviser charging, we are looking at the biggest separation between advice and providers that we have ever seen. [The question is] how are [providers] going to get their products out to the market?’ he said. ‘It’s a tough balance for product providers because history has shown that where they bought distribution in the past, it hasn’t always worked out well for them.’
What can providers do to ensure they maintain a degree of control?
David Shelton, an independent consultant at Stoke Bishop Associates, predicted there would be a trend for providers striking deals with advisers to look after their lower net-worth clients and possibly orphaned clients, to whom they could then sell products.
‘I think for the next two or three years, providers will concentrate on picking up the orphaned clients that advisers will not want to deal with as a result of the RDR,’ said Shelton.
‘There will be a lot of those [orphaned clients] mainly because IFA firms are generally, because of costs, moving towards the medium and higher value clients and those lower [value] clients will effectively become orphaned. That’s where the opportunity lies in the short term for product providers and direct sales forces, more so than buying into IFA firms.’
Shelton said this was a much lower risk approach compared with owning part of an advice firm.
Providers often paid too much for IFA firms, he said, and had trouble keeping an appropriate distance or independence from the business, which had created a tension between management and compliance. ‘It has been quite variable in the past, there have probably been more failures than success if you look at the last few years.’
The orphan proposition
Providers taking on lower value or orphaned clients from advisers was a completely different proposition, said Shelton.
His prediction is based on movements already being made in the market. A number of providers have launched, or are considering, propositions that would allow them to deal directly with clients.
AXA Wealth is one such provider, having launched an execution-only platform that will be white-labelled under advisers’ brands.
New Model Adviser® reported in October that Standard Life had approached advisers about the possibility of taking on the lower net-worth clients they can no longer service profitably. The provider is understood to have canvassed its wrap users about this proposition, which involves the advisers retaining the trail commission until a chargeable event, such as a withdrawal or top-up, takes place, whereupon future payments would go to the provider.
The Prudential relaunched its direct sales force at the start of 2012 and Scottish Widows has announced plans to increase the size of its tied sales team.
Providers emphasise collaboration
The providers are keen to stress their moves are not a threat to advisers. Standard and AXA both said they wanted to work with IFAs on their projects, and the Pru said its sales force would only target clients who had been sold a Pru policy directly in the past.
Innes Miller, head of business consultancy at support services provider Threesixty, which is owned by Standard Life, said advisers should not see these strategies as a threat. ‘These provider propositions make a lot of sense, those clients need to be served...and we will see providers come into this area,’ he said.
‘It’s not competition and it’s nothing to worry about. Providers know advisers advise individuals very well, and they know that [consumers] are not going to get that service from a large organisation [like a provider].’