the chairman of st james's place capital rings in the changes for 2003
Whenever radical change is afoot in the insurance industry Sir Mark Weinberg is usually close to it.
During his 40 years in the sector he has helped to forge Hambro Life, Abbey Life and St James's Place Capital. Having originally helped to introduce polarisation in the 1980s, he has since become a strong and successful advocate of its removal. Now chairman of St James's Place he talks to Investment Week about his views on outsourcing, Sandler, Myners, stakeholder, distribution, financial advice and why he has supported depolarisation.
St James's Place has contracted out the investment management contracts on its life, pension and unit trust funds. Why?
It means we can choose the best managers and change them painlessly. We give them one month's notice of a change. It is also painless for an investor. There is no CGT, no charges, no issue of whether the adviser is influenced by commission.
The fourth and final advantage is we offer five core funds run by five managers each with a different style. By encouraging people to mix them they can be diversified by style rather than just have one holding.
Would you launch a fund of managers to the retail market?
I would not say it is not a possible suitable vehicle for the retail business, it is just that, for this market, we have got a complete range and we like and recommend balanced funds. For individual consumers there is no demand to move from balanced funds. At the retail level, an individual with £20,000-£50,000 does not say: 'I should have 50% in the UK and 15% in Japan.'
What other reasons are there for balanced funds?
The retail market does not have to balance assets and liabilities in the same way as institutions. We have five core funds and recommend people spread their money between them. We expect each of our managers to be aggressive, or certainly active, so we are not putting money with any closet trackers.
Why has closet tracking been so popular for many groups?
Most money managers are asset aggregators. They are in the business of capturing and holding onto pension fund mandates. They hold them for three years and then there is the beauty parade. If your performance is average then nine times out of 10 you will keep the mandate. If you are minus 10% then you lose and if you are plus 10% you still keep it, but you would have kept it anyway.
How close a watch do you keep on what your managers are doing?
When we select a manager we nominate the individual and require to be told when that individual is leaving. For instance, we use Schroders as one of our five managers. We said to them we would use them provided the UK element, which is 60%, is run by a man called Ted Williams and we wanted him to pick his 30 best ideas, rather than the 80-100 you usually get with Schroders. The result is that each of our managers is active.
Do you offer clients the choice to rebalance between these five core funds automatically?
No, we have 1,100 tied financial advisers and unlike the average IFA or company such as Merrill Lynch, we do not characterise our people as investment advisers. We see their job as to know our range of funds and visit the clients every three to six months. Their job is not to recommend funds. The only positive advice we allow is to say 'spread your money equally between funds.' In the end, it is up to the client to make the decision.
What are your views on the Sandler Report overall?
Page 129 of it covers how people are supposed to judge who is a good or bad manager. Sandler says past performance is of little help and therefore it is of no use in the absence of detail technical analysis of styles. He goes on to say very few people have access to this sort of knowledge. We would claim we are doing exactly what Sandler says: providing the analysis. If you go into it deeply enough, it is possible to work out the good from the bad.
Is there any major point where you disagree with Sandler?
He says if you analyse the performance of a portfolio, you'll find you gain more by asset allocation than by stockpicking and therefore what really matters in good investment management is asset allocation, not stockpicking.
In one sense, he is right. If in January 1982 you took $1,000 and put it into yen and into the Nikkei, then in March 1992 switched to dollars and put it into the Nasdaq, and then in February 2000 put it into US Treasuries and more recently switched it into euros, you would have turned it into $110,000. But that is hindsight.
Either there is such a thing as recommending good managers or, if it is all random, why are we all in the business? There must be better investment managers and a way of tracking them.
Is the 1% stakeholder world the way to encourage more saving?
No one wakes up and says 'I must go and buy a pension or a life policy.' People just don't do it. Advice has two parts to it. It is someone who knows more about a topic than the average individual recommending a course of action. It is also the gentle persuasion without which people do not act.
I have met people who say they met a salesman and did not want to speak to him about pensions but then they went through it and they felt great. Savings of any kind involve a delay in consumption and consumption is more pleasant and immediately satisfying. So if there is to be saving other than by compulsion then you have to have advice, of which an element is gentle persuasion.
What would be a realistic stakeholder charging structure for a big insurance company?
I can see a new type of polarisation arising as a result of Sandler. It will be between those organisations that sell to the mass market on a minimal charge or advisory basis, such as Legal & General if it decides to specialise, and other organisations that will be adding value and have higher charge products adding in advice.
Can you focus in on the economics of supplying the first group?
To make it economic to sell to those people Sandler made a very valid point in his analysis: it is the amount of time its takes to sell to someone else that is an important consideration. Since people are paid for their time it follows if I sell a very small policy it would not cost a lot less than if I sell you a big savings plan. If you related charges exactly to the amount invested you will disenfranchise the small saver. Therefore, if you want to look after the small savers, you have to make the product so simple that they do not need the advice and therefore can do it for themselves. You cannot get around the logic of that.
Can that simple product be taken up by everyone?
You ultimately draw the conclusion that once you are far enough down the social scale you cannot encourage them to save and so the state will not get out of the obligation of looking after them. Otherwise, you have a compulsory savings scheme which is what the state pension is because everyone pays NI.
So what would your product for the mass market be?
I am not the right person to ask as I am not in that market. But the most significant change that has taken place in my long lifetime in the industry is the arrival of the front-end loaded contract. For instance, you put in £1,000, or whatever, and 75% of the first year went in commission and charges, and that was historically acceptable and worked particularly well in a with-profits world, with front-end charges fixed at the discretion of the life company. You are putting your money into a blind pool and somewhere, 30 years later, someone tells you what you get out of it. The life company can use most of the first year's premium to pay the salesmen for their time. Some 90% of a pension plan's costs take place at the point of sale. The with-profits mechanism was quite a good way of keeping the mechanism opaque.
The front-end contract is out of favour now. What are the implications of successor charging structures?
The biggest change on the past 10 years is that the concept of front-end load is almost gone. The whole emphasis has gone much more to a modest charge, say, a 5% spread with a percentage of remuneration to the life office or individual coming from a trail fee. If you think that the salesman has still got to live and he needs to be paid now, not over the next 20 years, then the life office takes on the task of funding the salesman. From the consumer's point of view this is socially acceptable.
Is it possible to make money in a 1% world?
That 1% figure was plucked out of the air. The whole industry said it was too low. The exception, almost the only exception was Legal & General which has properly geared itself to work within that. If it was 1.5%, or maybe 1.75%, there would not be a fuss about it. That extra gives life offices sufficient future revenue to finance the salespeople or IFAs and recoup money out of future charges it makes.
It sounds like you prefer the old charging structure.
It is not socially acceptable to do it. Someone like Equitable in the old days would have said: 'There are lots of classes of policyholder but the expense is getting the policy on the books.' Take one person who leaves early. The real problem is that the money has been spent. So someone has got to pay the costs. Is it the continuing policyholder or the discontinuing one?
The actuarial profession would argue until a few years ago that continuing policyholders should not have to subsidise the person who leaves. For example, imagine you buy a fridge and after one year you can take it back to the shop and get a full refund. For the shop owner the only way of financing that is by raising the price of the fridges for everyone. So people who buy and keep their fridge have to pay a higher price. In a sense that is what consumerism has done. It is now accepted that if you cash in early you do not lose. The industry has stopped arguing about it and I have stopped arguing about it.
Are direct sales forces bad?
I think it is entirely down to the quality of the sales force. If you take pension mis-selling, and much of it was not necessarily as much mis-selling as was characterised, most people say it was done by the sales forces rather than the financial advisers. The reason that appears to be the case is that the FSA and PIA could not go and police five million policies so they said to the life companies, 'it is your responsibility to check policies on our criteria to see if there is mis-selling.' The life offices have spent millions of pounds doing the check. If you sell through an IFA then life companies have not got the responsibilities and that is why Standard Life, Norwich Union and so fourth did not have to do this. It was up to advisers to check their sales and inform the FSA if they had mis-sold. There are good IFAs and bad IFAs, and there are good salesmen who are well-managed just as there are bad salesmen.
How influential on possible mis-selling is the way direct sales forces are remunerated?
Equitable ran all its marketing on the basis that it paid no commission. The truth was it paid a modest salary and had a highly geared bonus system to its salesmen that was commission in everything but name. We have recruited people from Equitable who were on a £10,000 basic and £100,000 bonus. So there is a potential issue in the commission system that you have to worry about or be alert to.
On the management side at my last company, Allied Dunbar, we used to pay our managers largely by override of commission, so the manager would get the equivalent of 15% or 18% of what the sales man earned. If you are looking for a manager to lay down standards on whether the sales force is behaving there could be an issue.
So have you put in place a different remuneration structure at St James's Place?
When we started, our managers were paid a salary, not commission on what salesmen produce, and we pay them a bonus that is related to particular things we are looking for, including compliance and persistence.
Is salary a sensible alternative to commission?
My 40 years' experience of dealing with salesmen and IFAs is that some people are better than others. However you pay them, some salesmen will still sell four times as much as other people.
If you pay everyone a salary and one person sells four times as much then you are clearly overpaying one person and underpaying the other, and sooner or later you going to dismiss the person who is underperforming. So having a salary paid could add pressure as he or she could lose their job.
So there is no solution to it, as some people are more productive. It is what makes the system because good people can charge more. That puts a heavy onus on the employer to set up controls to measure that salespeople are not misselling or overselling. That is the big challenge that has taken place in the last 15 years.
If you started up an insurance company today, how would you structure it?
In a way every life company or wealth management group is seeing significant change coming into the industry. Polarisation is ending, consumerism and regulation have radically increased the cost structure of the industry and at the same time the regulator is trying to push down prices.
On top of this, you have had a real shock to investment markets of the kind we have not lived through inside the memory of all of us. All of us are having to look at our organisations and ask 'does this model still work in the 21st century?'
With that background in mind, what is your solution?
I am going to talk my own book. We believe that the world is changing and the old life assurance model was not working in the new compliance environment. We took a conscious decision two years ago to reorganise ourselves to provide broader services that were very much advice based and where the remuneration to salespeople and the company was much more related to funds under management than to selling policies.
What factors do you need to take into account to survive in this environment?
First, you need to be careful about the sort of salesperson and financial advisers you recruit. Second, you need to have good monitoring systems in place. Third, the costs of compliance have become huge. Our figure is something in excess of £15,000 and nearer £20,000 a year per financial adviser we recruit.
If you think the average life assurance industry salesman is earning less than £30,000 then the cost of compliance is huge. Ours are earning twice that so that changes the model. That is one of the important reasons why the Pru got rid of large-scale selling a few years ago. It was not at the top end of the market and compliance costs were very high.
Are there any other factors?
Fourth, contract out investment management. Fifth, do not try to do everything under one roof. That is one thing polarisation imposed upon us.
It says if you try go through IFAs then you can only sell your own products.
The good news from depolarisation is we can decide what we do not want to be in, say, the term assurance market, and we can buy it in.
For instance, we have a joint venture with a couple of companies of solicitors for trust business, we have group life and sickness from Swiss Life, and banking is offered via Halifax.
Who is going to take the bit of market that life offices are going to have to give up? And if it is the banks, how do they use their networks to sell financial products?
The model on the continent is that the bank is not the sort of place where you go to queue. On the continental model, there is a cash counter but there are also chairs and your bank is a place where you go to talk to a couple of consultants even if it is only about your bank affairs. Even if you go to the Halifax, it is getting rid of its grills.
So far the UK banks have not been successful for cultural reasons. Banks are not in the business of being very friendly. The culture is very strongly embedded into the bank.
You helped to bring in polarisation in the 1980s, why are you now advocating getting rid of it?
I think in concept it was almost necessary in 1986 as it was a chaotic marketplace. There was no concept of training, brokers had special deals with life offices which paid their rents, salespeople could present themselves as either brokers or life office salesmen, there was no tradition of compliance or disclosure. To clean this up you needed to draw lines and see the difference between independent and non-independent.
So do you believe that the environment has changed?
We said at the time that any regulation is anti-competitive and you have to balance that against the benefit you get from it. On balance, we felt regulation was worth it back then.
Some 15 years later we have a highly regulated market and the anti-competitive element now makes more of an impact.
If it is so important to be able to offer choice, did St James's Place ever consider going totally independent?
No. We felt we could control the quality of people better if they are working for us. Under the FSA we are 100% responsible for what our sales force does.
What will be the shape of with-profits and the with-profits market in 10 years' time?
Twenty years ago I said if you had more terminal bonuses and so forth then you would end up with unit-linked assurance by another name. In five years' time you won't be able to draw a distinction
Sir Mark Weinberg
1961: Founded Abbey Life Assurance Company.
1971: Founded Hambro Life Assurance.
1985-1990: Deputy Chairman SIB.
1991: Co-founded St James's Place Capital.
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