Retirement Planner put a panel of Scottish Widows experts on the spot about how they will be supporting advisers over the coming year
Helen Morrissey: A lot has been made of the challenges and opportunities RDR brings for financial advisers. Is the intermediary market going to be unrecognisable in 12 months?
Simon Massey: I don't think unrecognisable. I think there will be many qualities of the market we know today that will still be present, but there will be some differences.
Without a doubt there are a number of firms that will have to adapt their business model. Potentially some of them are still working out what services they can add.
What value can they bring and how are they going to charge for that? There will be some learning as we go and hopefully a lot of those advisers will find their feet.
Pete Glancy: I think you are going to see two trends emerging. One is a much better use of technology. Technology is now at a level where it is possible to make the interaction personalised and interactive.
The most successful firms, I believe, will be the ones that make best use of technology. It brings down cost and adds value in terms of the interaction with the customer.
The other trend is a greater emphasis on marketing the advice proposition itself in terms of the value that creates as distinct from the product. They are going to have to be more explicit in terms of charges and I think you will start to see some successful firms with advice brands starting to emerge.
Robert Kerr: It is a case of evolution as opposed to revolution. Many firms have been busily preparing for RDR for a number of years but I do think we are going to see 2013 being a year of two halves.
There is significant commission business in the pipeline already, that is being advised upon. That commission will be paid in the first half of 2013. For the businesses that are struggling to adapt they are not going to have that cash flow coming through in the second half of the year, and that is where we might see change in the market.
Helen Morrissey: Can you tell me about how Scottish Widows is going to support advisers?
Robert Kerr: What we have been looking at is how we provide tools to give advisers help in building that proposition and fixing their fees.
We built tools for the individual and the corporate market that help advisers through that process and allows them to charge appropriately.
Pete Glancy: I think one additional point for adviser firms to think about is client segmentation, because it may not be possible to provide the same breadth and depth of service to all clients. An adviser should think about different categories of proposition at different prices and then which of their client bank would face into each of those propositions.
Helen Morrissey: As part of this debate we asked people to send in their questions. We've got a question from Gillian Cardy, managing director of the IFA Centre, and she was asking how will consumers react to the clearer distinction between independent and restricted advice, whether by product or provider?
Robert Kerr: It is a good question because essentially that market is still at a very embryonic stage. That market has probably not emerged as quickly as we thought it would and if we were having this debate a year ago I think there would be big predictions about the size of the restricted advice market.
The consumer reaction in our research highlighted that, certainly, consumers saw restricted advice as a sub-optimal service. Now, whether that will play out in practice, I am not sure. But the reality is there will be room for both in the market. There will be some advisers who can serve their customer base as it is today through a restricted offer and they will be able to do that job just as well as they have done historically.
There will be advisers who will absolutely want to stick to that independent brand, because it has a meaning out there - customers understand it - and they will perceive value within it.
Helen Morrissey: If we can move onto our next question, which has come in from Phil Young, managing director at 360 Services. He is asking are providers taking a sensible approach to legacy commission and what is Scottish Widows' position?
Robert Kerr: I am not sure I would have written the rules exactly how they are written. I think this is going to be a really difficult area for advisers. We have got a number of different treatment strategies across our product range and within that we have tried to bring out a few key principles.
We have tried to make sure that, for advisers looking to keep business on a commission basis have the opportunity to do that; but if they are looking to move it onto adviser charging, they have got the capability to do that as well.
So, really trying to give them flexibility that if they want that recurring income from commission, it is there; but if they want to move into that new world, it is there as well, and avoid the situation where you have got a commission paying product that you cannot change and the customer then has to pay two advice fees effectively.
Helen Morrissey: How would you change the rules?
Robert Kerr: I would have done a much cleaner split between pre-RDR business and post-RDR business.
I think the fact of the advised top-up, the advised increment, just complicates everything to such a degree that we would have been better without it and instead we have got a situation where, you are having to make some very hard cost benefit decisions based on platforms and change capability that will impact customer choice. I do not think that was the FSA's intention when they set the rules.
Ian Naismith: I think the rules are anomalous. If someone has got a stakeholder pension, they go to the adviser at the outset; the adviser is being remunerated by commission.
If the client says, "I want to increase my stakeholder pension", the adviser does not give them any advice and can take commission for it. As soon as the adviser gives advice, they can't take commission so immediately the client's having to pay a fee. That to me does not really make sense.
Helen Morrissey: Could anyone on the panel give me examples of potential pitfalls advisers really need to be keeping an eye out for?
Robert Kerr: I think the area to watch out for is ensuring you are not double charging.
So, in a situation where the provider can't switch off the commission, that commission will be going into a suspended account somewhere and the adviser needs to charge the client a fee. That kind of position where you're getting no rebate back into the product is going to lead to a very poor consumer outcome. But I think advisers will be aware of that and if that's a situation, that product will be rebroked into a cheaper product going forward, with a lower AMC and an appropriate adviser charge.
Simon Massey: The other thing to watch out for is where there will be a lot of non-advised increments going through. I think if we start to see a significant shift in the number of those non-advised increments, one has to ask the question is there really that much non-advice going on in the market? Have some advisers overstepped the mark on what constitutes genuine non-advice?
I think we'll see the regulator looking very closely at this area and say, "Did you really not give advice on that increment? Let me see your file to prove it".
Helen Morrissey: Pete, as head of corporate pensions, are there any potential consequences for corporate pensions?
Pete Glancy: The situation for corporate is a bit different. Where an advice event in relation to the establishment of a corporate pension scheme takes place before R-Day, then it is allowable for us to pay commission on new entrants and increments to that scheme beyond R-Day.
As financial advisers know, we made a commitment to the market some time ago to honour the commission terms in perpetuity beyond R-Day. That is a commitment we stand behind very firmly.
But we see the role of financial advisers as being critical to ensuring employers find a scheme that meets the needs of their organisation, but also that the outcomes for their employees at retirement are the best they can be.
We believe the commitment will allow financial advisers to make the transition from the pre-R-Day world to the post-R-Day world by underpinning their cash flows, during what is probably going be quite a challenging transition.
Helen Morrissey: You changed your participation strategy in 2012. Why did you do that and what impact is that going to have on your customers?
Simon Massey: So, in 2012, what we have really focused on with our participation strategy is coming out of the offshore bond market and we have announced that we are going to move towards annuities. I do not think there will be much impact because we have made a big commitment to maintain service on the existing book of offshore bonds.
By entering these new markets, it will help us offer a broader range of services to IFAs.
Robert Kerr: We are taking conscious decisions to exit those investment markets because the economics are challenging.
Helen Morrissey: Pete, why do you believe advisers should choose Scottish Widows?
Pete Glancy: We have got a track record of investing heavily in our proposition.
Not everyone has that same track record. We have invested heavily in our technology platforms across our product lines. In my particular world, we have invested in an employee engagement platform called My Money Works, and we are launching a platform for employers to help with auto-enrolment called Assist Me.
Over the last three to four years, we have spent over £100m investing in the corporate pensions platforms alone and we will continue to invest heavily. We need to get great outcomes for our customers and we need to do it in a way that does not give rise to a huge amount of cost for financial advisers and allows them to create commercial opportunity by appending value-added services.
Helen Morrissey: If we come to the question posed by Keith Richards of the Tenet Group. How can providers such as Scottish Widows help intermediaries maintain profitability in 2013?
Simon Massey: We have developed a tool that will help IFAs understand the costs in their business. There will clearly be market pressures on what they can charge, but a good start point is what is the cost for me to deliver some advice?
So we are helping with that. We are also trying to help them in other ways, so things like linking to the back-office systems and building straight-through processing into our propositions helps take cost out of their business.
I would also say we are continuing to invest in our account managers, both on the ground and over the phone to provide first-class support to intermediaries.
Helen Morrissey: If we just talk about how advisers are marketing their services and demonstrating how they provide value to their customers.
Pete Glancy: Financial advisers need to become good at marketing and it is all about communicating the value their services are going to provide. So it is not about the product, it is about making it possible to send your kids to university, it is about making it possible to retire a bit earlier than you would otherwise do.
Helen Morrissey: If people don't believe they are paying for advisory services, how can advisers say that they are bringing value?
Ian Naismith: I think advisers need to get to the point where they are seen in the same light as solicitors and accountants. Advisers probably offer a lot more added value for a lower cost, but I do not think people realise that. It is making clear to customers what they are getting and that there is an appropriate way to charge for it.
Helen Morrissey: Our next question is from Paul Baker, managing director of Independent Financial Services. His question is has the industry underestimated the impact of auto enrolment and what does it mean for the future of individual pensions?
Pete Glancy: I do not think the industry has underestimated the challenge or the opportunity. Some 6,000 firms will be affected by auto-enrolment this year, but next year there is a further 40,000 firms and they need to start preparing now.
Our experience, from working with some of the clients who are staging now, tells us there is an awful lot of preparation employers need to do. They need to understand the peculiarities of the legislation as it applies to their organisation and how it overlaps with previous and existing legislation.
Some employers will need to take legal advice and engage external help in that regard. They also need to start mapping out in terms of their systems and their processes, through their HR system, through their financial systems, how they are going to put the various mechanics in place. They need to look at the cleanliness of their data.
These are massive challenges and, having worked all that through, they then need to start thinking about shaping a pension scheme that meets the needs of their organisation and picking a pension provider who can put a pension scheme in place. This is a big project.
Having picked a pension scheme and a pension provider they want to work with, there is then a very substantial implementation project you need to do, mapping out the processes, testing the data files and planning the launch communications and the campaign to get that established within the workforce. It is a huge exercise and you cannot start early enough.
Helen Morrissey: Peter, can you just go into a little bit more detail as to how Scottish Widows is positioned for auto enrolment?
Pete Glancy: Well, we are positioned very strongly. Our first priority is making sure we support our existing clients and we have had web services and other support available for advisers, employers and employees. Most recently, we have been investing in a new platform to help employers through the challenge and we see the platform having three goals eventually. One is to take away the complexity of compliance.
The second thing is take away the operating costs. We are in a tough economic environment, we do not want employers to have to take on a bunch of extra ongoing costs.
The third thing we want to do is minimise set-up costs. We do not want them to have to make big IT changes to their systems. So we have been building a new tool which we have called Assist Me and we are using that with our early stagers. It seems to be working very well.
Helen Morrissey: What does auto-enrolment mean for individual pensions Ian?
Ian Naismith: We are definitely going to see some shrinkage in the individual pensions market. So if you are a moderately paid employee and your employer offers you a pension and will pay into it then why wouldn't you take it?
So I think at the lower end of the individual market, we will see a lot less new business coming in and that will particularly affect stakeholder pensions.
People who are higher paid are not necessarily going to put all their eggs in one NEST, if I can use that term. It has got a very cautious investment approach for instance, which probably isn't suitable for everyone. It is designed for people who have very simple pension needs, so they are much more likely to say, "Well, I will take what my employer gives me, but on top of that I may pay into my own individual pension as well".
So, I think the top end of the personal pension market will remain strong while the bottom, the stakeholder end I expect to wither.
Helen Morrissey: How is Scottish Widows positioned in the individual pensions market?
Ian Naismith: From this year our focus in the individual pensions market is on our Retirement Account. The aim is that it will be suitable for those with very simple needs who do not want to make too many investment decisions, right through to more sophisticated investors who, with their IFA, are able to talk about what they want.
Helen Morrissey: What opportunities does auto enrolment present for the financial adviser?
Pete Glancy: There are 800,000 employers who do not have a pension scheme who will be affected, and these people need help.
When people have a very strong need like that, there will be opportunities for advisers to provide a service that helps those employers with auto enrolment. There will be millions of people coming to the pensions savings market for the first time; you cannot get a better opportunity than that.
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‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected