Each month, in an exclusive survey in association with Incisive Research, RealAdviser will canvass a broad panel of intermediaries for their views on a wide range of different topics.
On this occasion we asked a series of intermediaries for their views on life offices.
Intermediaries were canvassed on how often they used life office products, which providers they preferred and why.
The report also covered intermediaries' use of external links offered by life offices, favoured features, and service levels.
It also looked at whether intermediaries still recommend with-profits funds.
It explored what intermediaries were using as a replacement and asked for their comments.
THE STORY OF the UK life industry has been well told.
After the failure of their flagship withprofits products, issues over solvency, high charging, poor investment performance, life offices retain little credibility with much of the investing public.
They have undoubtedly been victims of declining stock markets, but many have been the architects of their own downfall.
The industry is now trying to reform itself with the hot breath of the FSA on its neck.
This month's RealAdviser Inquiry looks at how the intermediary market views life offices and whether intermediary trust can be restored.
Has FSA intervention ensured that overcharging and solvency issues are a thing of the past? Richard Baddon, a partner at Deloitte and co-author of a report into life offices' financial strength, says: "We would like to think life offices have overcome the problems they have faced. On a macro level, there are a couple of instances where the industry has behaved in the right way, contractually, with groups losing shareholder value as a consequence. Overcharging is most definitely a thing of the past, but getting that trust and confidence back to the intermediary is hard in this complex and difficult industry." The report shows that intermediaries' trust in life offices in waning, with 35% expecting their clients' level of investment in life office products to lower in the next 12 months.
But there is residual strength in many of the life office brands and 51% of intermediaries said they would keep their clients' level of investment the same.
Intermediaries are clearly not willing to abandon the sector just yet.
Alasdair Buchanan, head of communications at Scottish Life says: "We feel the life office industry has been going forward in both business and marketing terms. Intermediaries are understandably sceptical with so many legislation changes recently, which have affected both the provider and adviser. The main problem is ensuring we do something to re-install trust and confidence to the public in what we are offering." What have life offices been doing to improve their position in recent years? The FSA has tackled solvency, with-profits, pensions, charging and depolarisation - with varying degrees of success - in an attempt to shake-up the business and ensure that life offices are treating customer fairly.
Simon Douglas, managing director at Standard Life, believes that at a market level, pension simplification is the crucial change.
The research report shows that 57% of the intermediaries surveyed use life office pension products.
Douglas says: "One of the most important things for the business has been the announcing of A-Day. This is good news as it is overwhelmingly a contract-based scheme, rather than trust-based. It realises there is no difference between occupational and personal pensions offering big opportunities in the market. Also Sipp's, something life offices previously left alone, will become mainstream and they will continue to be a growing market." But life offices still have a number of hurdles to overcome.
Many advisers highlighted customer service and administration as the biggest problems when using life offices.
Of the advisers asked, 65% found administration services unsatisfactory, while 62% found customer services below par.
The Hartford, a large US-based life office, which has recently entered the UK, says quality service and administration is one of its key selling points.
It is telling that the group can impress advisers with something that should be standard practice.
Standard Life and Skandia appeared as the two market leaders for advisers.
This view was partly based on customer service, but advisers also liked their wide range of affordable funds.
One adviser commented that Standard Life, 'understands the need to change in a changing world', another that the group has 'a good product, well-priced with good overall performance and brand name'.
Showing the importance of service, another commented: "Standard Life has the best administration; the group answers the phone very quickly and is always available." Skandia drew similar comments: 'A wide choice, fairly priced, good administration and a good website'; 'Good external fund range and technology support services'.
Fund supermarkets and wraps are the biggest potential threat to life office business.
With a wide range of external funds, the core business of many life offices is provision of product wrappers.
The likes of Fidelity FundsNetwork and Cofunds have been successful in reducing costs on the investment management side and fund supermarkets have become the norm for advisers for investment business, particularly for their lower net-worth clients.
Should a definitive wrap platform be designed in the UK, will life offices be rendered obsolete? Buchanan believes that the strength of the UK financial services market is its diversity and wrap is unlikely to become the dominant approach.
He says: "Wrap is not the ideal solution for all.More needs to be done to provide a holistic service for customers and there is a danger that a wrap service that is so successful overseas may not be successful in the UK, take a look at the compulsory pensions system in Australia, the UK market has learnt that you can't just pick up a system and transplant it in a different market- it's not that simple." Douglas says: "In some ways a wrap is almost a combined offering of a life office and fund supermarket, both of which have all the ingredients to make a wrap. However, a wrap will only be a threat in part of the market. There will also be new opportunities as it won't replace products and distribution." Are there threats from elsewhere? The Hartford's recent launch of Hartford Gold, a unit-linked investment bond, targeting investors in the long-term savings and investment market, indicated that life offices cannot rest on their laurels.
The product includes an innovative guarantee structure, plus links to six of the major fund groups.
It has generated a lot of interest in the adviser community - should the life offices be worried? Baddon feels groups joining the market will be few and far between.
He says: "As an industry it will continue to grow as there are opportunities, but it will become harder for new groups to join as the barriers to entry are getting higher. You need lots of capital to convince the regulator, as financial strength is extremely important. The other thing you need to do is offer something unique to the market." Douglas agrees: "It is extremely hard to come into the market with such healthy competition already there. You really need something unique, because with no track record, no one will use you." The industry certainly has more than its fair share of underperforming groups and is ripe for consolidation.
Buchanan believes that consolidation has been going on for some time.
He says: "There has been a fair amount of consolidation going on in the industry for the past 10 to 20 years. The likes of Provident Mutual, UK Provident and National Provident Institute are gone. Also groups such as Scottish Amicable have become part of Prudential. Even the largest companies do not have a massive market share, some are big, but none are dominant." This is borne out by our report when advisers were asked about the market leader, Skandia and Standard Life attracted 20% and 14% of responses respectively, with none of the remaining life offices attracting more than 7%.
With-profits has been one of the thorniest issues facing both advisers and life companies.
With billions of legacy money still held in with-profits, many advisers face the sit-or-switch dilemma with a large proportion of their clients.
Our survey asked whether advisers still recommended with-profits and an overwhelming 86% said no.
The majority of those who decided to move their clients' funds products cited poor performance (40%) and the option of better products elsewhere (35%) as the main reasons for their decision.
Buchanan thinks the future of the life office industry is dependant upon groups continuing to raise their standards in a number of areas.
He says: "Firstly companies will need to be financially sound, with appropriate capital and realistic valuations. They will also need a good strategic vision that is customer focused. A key area is also management competencies as groups' need an ability to deliver, it is no longer enough now to have the raw materials, the company also needs a clear direction." Douglas adds: "Companies need to put greater insight into customer needs.
They also have to put greater emphasis on a good service as the market doesn't really reward those who just have the best product range." The UK life industry has remained unchallenged for a long time.
It now has a number of threats to its business at a time when investors are more reluctant to part with their cash than ever.
Only those life offices with good service levels, good products and a good investment offering will weather this newly competitive environment.
Some are getting there; others will find themselves falling by the wayside.
Duo start roles on 1 October
Where true value lies
Economy to thrive despite global risks
Behaviours, animals or something else?