Steve Young, commercial director at Sense Network, on what he perceives as new exploitation from big distributors…
John Wayne immortalised the phrase “lock and load” in his 1949 classic film, The Sands of Iwo Jima. It has come to symbolise a kind of bravado associated with firearms and the military.
In today’s financial marketplace, the term can be used to describe a very different business strategy. The holy grail for any financial product manufacturer is to control a distribution channel where the level of price sensitivity is low and to lay off any regulatory liability from poor advice.
The independent channel has proved to be highly resistant to any control, and competition has ensured that, as far as is possible in a market with low price visibility, product margins have remained stubbornly low.
Steve Young lays into 'new' distribution models
Profit pressures on big IFA distributors are tempting them into strategic alliances where platforms and investment funds can be loaded with additional margin in structures designed to circumvent the adviser charging rules.
Now, independence is still attractive to advisers, so the providers create the illusion of choice by selecting a few insurers to offer product wrappers. They insist that each one of these insurers offers a fund which invests in your “owned” fund range and then lock your advisers into using these funds rather than offer a genuine choice.
And, having crossed that rubicon of abandoning customer interest in favour of personal gain, these customer champions are also exploiting the opportunities in protection.
In return for limiting provider choice and premiums loaded by 15-20%, the new style distributors are creaming off big upfront payments and inflated commission payments.
Load in some juicy “marketing” deals and you finally have a business model which appears to offer great returns and sustainability. And for the providers, they gain volume, enhanced margin on protection sales and they avoid having any advice liability.
I suspect Hollywood won’t be queuing up to use this “lock and load” concept in a blockbuster any time soon. Whether these structures are within the spirit of the new rules is debatable: that they are not in the best interests of customers is inarguable.
It is certain that the FSA did not foresee nor intend that “lock and load” strategies would be an outcome from RDR. Personally I remain confident that independence will ultimately remain the dominant channel for advice, but I very much regret that, in the meantime, too many customers will receive this shabby imitation instead.
And to return to the theme of this piece, perhaps it’s time that the FSA’s guns were “locked and loaded” to deal with the customer detriment which arises from these “new” models.
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