The 222 page report has attracted plenty of headlines on trackers and stakeholder but little attention has been paid to its less high profile recommendations and comments
The 222-page detailed Sandler report has caused much discussion over the past few weeks. In this issue we look at some of his comments with regard to intermediaries, their role and the
developments which have led to
the FSA's move to a depolarised world.
The IFA sector is characterised by a high degree of fragmentation, according to Ron Sandler. Of an estimated £3.4bn of IFA turnover, the top four intermediary firms generate only 6%. The number of active advisers stands at some 26,000, working in an estimated 11,000 firms.
With 37% of IFAs operating as sole practitioners, the reliance on networks has increased over recent years, with almost half of all registered individuals now network members.
This structure of savings distribution in the UK has seen considerable change over the last decade, with a sharp decline in direct sales forces (DSF) and a growth in IFA numbers.
Dedicated sales forces
° Since 1991, it is estimated that the number of registered individuals in DSFs has reduced from 190,000 to around 20,000. Some caution needs to be taken in interpreting these figures as in the early years companies registered many employees who did not provide advice to consumers and have since been deregistered. Nonetheless, the number of advisers operating in DSFs has reduced dramatically over the past 10 years.
This has been driven by three key weaknesses:
• failure to appeal to higher-income customers;
• high turnover of staff; and
• high compliance costs.
° Sandler highlights that a study for the Association of British Insurers argued that supervision costs for DSFs at £6,400 per adviser per year were 40% higher than for IFAs. This, he argued was because DSFs have historically had a higher incidence of mis-selling cases, partly because of their lower skill levels and greater focus on lower-income groups.
They therefore attracted greater levels of regulatory attention, creating in turn a more interventionist compliance culture within their firms. Legal responsibility for DSF mis-selling lies with the provider. Many providers, particularly those active in other financial services businesses, are keen to protect their brand from the resulting reputational risk and are willing to incur additional compliance costs.
IFA proportion of sales
° In 2000, IFAs accounted for 55% of sales of life products by value and generate between 45% and 50% of sales in the unit trust and Oeic market.
IFA sales of life products are only 20% of the market by volume, reflecting their focus on wealthier individuals. When coupled with data showing falling penetration of pensions products, this has led to concerns that lower-income consumers are effectively being disenfranchised by the shift away from DSFs.
° Available figures show that only 5% of life and pensions business is sold on an execution-only basis.
The figure for unit trusts/Oeics is somewhat higher, at 20%, reflecting the generally higher levels of financial sophistication within unit trust/Oeic consumers who, as a result, are more confident making purchases in this way.
The value of non-advised unit trust/Oeic business has grown considerably in recent years, assisted by the development of online funds supermarkets.
l It is estimated that approximately 50% of IFAs have formed a relationship with either FundsNetwork, Cofunds or Skandia.
Anomalies in pricing
° Examination of the direct purchase route reveals a striking anomaly in the retail savings market. A consumer purchasing direct from a provider generally attracts the same level of charges as when the product is purchased from an adviser.
This is despite the fact that the charges are designed to cover the costs of commission, which in the case of the direct purchase, are not incurred by providers. Indeed, to the extent that the adviser may rebate a portion of the commission, it can actually be cheaper to purchase 'retail' (through an IFA) than 'wholesale' (direct from the provider).
This anomaly reflects the distorting effects of bundling the costs of advice in with the pricing of the product. In reality, it should be entirely proper for a product sold through an IFA to be more expensive than one bought directly, as the former includes the cost of advice. That this is not, in general the case, pointing to a market failing arising from the opacity of pricing.
° Accurate information on commission levels is extremely difficult to obtain: not only is it of considerable commercial sensitivity but practices such as rebating mean that raw data usually requires modification if it is not to be misleading.
Such evidence as the Review has been able to gather suggests that two trends are at work:
• a fall in commissions for pensions products; and
• a rise in commissions for certain types of bonds, in particular with-profits, unit-linked and distribution bonds. Returns to the PIA demonstrated that rebating commission on pensions products has increased substantially: the percentage of new regular premium personal pensions business written through advisers (weighted by volume of business) where full commission was charged reduced from 80% in 1999 to 63% in 2000.
Other data show that commission offered by product providers has also reduced in recent years. Between 1995 and 1998, commission offered on a 25-year personal pension plan (unweighted) stood between 64% and 67% of the first year's premiums. In 1999, this fell to 56%, and in 2000 to 40%.
l The rise in commissions for investment bonds is less well documented, but it is an assertion which the Review heard on many occasions in discussions with both distributors and product providers. It was suggested that commissions for these products had risen by between 10% and 20% over the last five years.
The likelihood is that this reported rise in commissions reflects, at least in part, the exercise of market power by distributors seeking to compensate for the fall in income from pensions commissions.
With regards to CP 121
° The Review is concerned that the concept of a 'defined payment system' while having much to recommend it, is likely to be too restrictive. An alternative is needed which seeks to address the unsatisfactory aspects of the present system of remuneration, but in a more flexible way.
• The proposed 'lower tier of adviser' who would operate in a restricted product regime, is intended to reach segments of the market that are currently economically unattractive. Reducing the training and competency requirements on these advisers should certainly reduce distribution costs to a degree.
However, the Review does not believe that it will be practical to reduce the costs of the sales process in any significant way, consistent with retaining the duties to provide suitable advice and to 'know one's customer' as presently set out in the Conduct of Business rules. If the lower tier adviser is limited in what he can say to persuade consumers that a product is suitable for their needs, he is unlikely to be successful in persuading consumers of the need to save at all.
Speaking at Professional Adviser's conference
Equity release panel
Speaking at PA360
TISA's Peter Smith
Shone a light on 'closet trackers'