Is it just me or is it finally the case that analysts and other industry observers are finally beginning to get their heads around the concept of persistency and its interfering little brother, churn? I see it as a rather straightforward issue.
For years, the life industry has celebrated results season with a plethora of good news stories, each one finer than the previous. In stark contrast to the reality of life inside many of these organisations, it seemed as though providers could do no wrong.
Given that so many companies found their actuaries being forced into hiking commission rates by broker consultants chasing their yearly bonus, it has long staggered me that shareholders remained oblivious to what was really going on.
All we were essentially seeing was a recognition in cashflow (but strangely not profit and loss) terms that distribution held the key, but until now this has never been properly reflected in valuations or balance sheets. The life sector appeared to believe - perhaps even still does - that the customer would ultimately pay for this folly, and to be fair they may have a point.
Too many IFAs have been willing to receive what appears to be ‘free money’ without sufficient regard for who was ultimately going to pay. They have often argued that churning is fine provided the customer is no worse off.
Now while this may be true in the short term, one must consider the long-term position and not assume that the status quo will remain. Rest assured, the shareholders of the large life and pensions companies have no intention of injecting capital to support legacy book some years down the line.
So where does this take us? Will the already tarnished sector be further discredited? I am sure that despite the ABI’s protestations, the UK life and pensions sector does not command the greatest deal of respect around the average dinner table.
Of course, all of this ultimately boils down to fairness and transparency. IF firms are comfortable with their margin and accountable for it there is no problem. From life offices, to platform providers, to asset managers and to IFAs, why don’t we all indulge in a wee spell of openness?
If you’re not comfortable with what you’re charging for the products and services you are providing, it is unlikely your clients will be either.
And that is the moral at the heart of persistency and churn.
Have your say: Dennis Hall says:
I agree 110% with David's comments regarding churning and the attitude of some companies and advisers that it is acceptable to churn business on the basis that there is no loss to the client.
We take a dim view of companies that are prepared to raid the coffers of their business to pay commission to advisers that churn business. We also take a dim view of advisers who on the pretext of there being no loss to the client will take maximum commission when churning business.
This money is not free, it has to come from somewhere, and invariably it is other policyholders who will pay in the long run. If ever there was a reason to support the removal of commission from the advice process it is this. If each case of churning was undertaken on a commission free basis, and the client charged a fee then I wonder how many cases would still proceed?
Providers and advisers should take care that by milking this particular cow they don't give the FSA the additional firepower needed to bring an end to their cosy commission club.
David Ferguson is chief executive of Nucleus Financial.
The views expressed are those of the individual and not those of the company he represents.
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