Michael Porter, a professor at Harvard Business School, spoke some wise words on business: “If all you’re trying to do is essentially the same thing as your rivals, then it’s unlikely that you’ll be very successful.”
In the last month or so we have seen the publication of 2012 results of life providers and they make for interesting reading. Legal & General, Prudential, Standard Life and Aegon all reported significant profit improvements in 2012.
Friends Life and Aviva have been less fortunate; the former suffering from integration costs and the latter looking to develop a new strategy to recover its business. All the statements from the chief executives published with the results indicate a level of bullishness for the future of their businesses, which might lead one to believe that all is well in the world of UK life companies.
However, there was disappointingly little detail on the impact of RDR beyond statements of readiness and occasional comments about it offering opportunities. One might infer that this represents a business-as-usual approach following the hiatus of activity to accommodate adviser charging.
Approach
This approach to RDR overlooks some profound changes taking place in the market. The move to adviser charging inherently means that advisers are less dependent on life providers than they were in the days of commission. The role of the life office in bank-rolling advisers’ commission has ended and the relationship with advisers has changed fundamentally as a result.
In the past, providers and advisers were both focused on volume of new business; today, advisers are much less interested in new business volume as they have moved fully or partially to trail fees for advice and on-going service. The relationship between adviser and provider is changing from one of dependency to independency and with it there is a shift in power base. Today some adviser firms have assets under management of over £1bn – 20 years ago that would have been a respectable size for a life company.
There will be a drop off in new business volumes post-RDR and it will result from advisers being less interested in product sales. There is also a regulatory focus on ensuring that certain pre-RDR practices are not repeated. Recently Rory Percival from the FCA was quoted saying that the regulator expected to see less “inappropriate replacement business” than before 2013.
This referred to moving a client’s already-invested assets between investment products. Given that this behaviour was at the heart of the reason for banning commission on investment products under RDR, there is little reason to suppose there will be any change in regulatory stance. Indeed it may lead to contingency fees becoming scrutinised if they lead to behaviour that generates outcomes outside of the policy on treating customers fairly. It seems certain that new business volumes will be negatively affected.
The life provider response to RDR has been much less dramatic than one would have expected. Such a fundamental shift in the market surely calls for a change in strategy. When you are no longer economically aligned to your customer base you must be ready for radical change. For the most part the providers have preferred a work-around solution that perpetuates the status quo from 2012 and before.
The RDR has largely been viewed as an adviser problem that does not affect the providers beyond their product suitability. It is seen as a change in the remuneration method for advisers that implies a change to systems to remove commission payments and substitute adviser charging options. In reality, the adviser market is moving in a different direction to that of most life providers.
There have been ‘restructures’ of sales and marketing teams to reduce overheads but this is more a continuation of existing thinking. Cost bases remain high and need to be reduced, but with some providers we are looking at the latest in a long line of restructures – none of which seem to have had the desired effect. Ultimately, continually reducing your overheads is unlikely to result in a successful business.
In 2013 providers have set their usual ‘stretching’ targets and dusted off their products to make them suit adviser charging but that is about it. There is no evidence of the market preparing for lower business volumes. Lower new business volumes mean lower new business profits; and for those companies that have not disposed of their back-book, an increased reliance on profits from legacy business. Those life companies with wraps are seeing profit from legacy business under threat as they migrate to a platform structure. This results in much lower margins going forward since the appetite for cost in wraps is significantly lower.
Lower profits in turn will make it harder to find investment-spend to fund new product offerings. The problems are made even worse by the success of newer entrants in the market. Transact, Ascentric, Novia and Nucleus have noticeably lower costs bases as does Cofunds. It is interesting to note that the higher cost base wraps tend to be produced by the life companies.
With the bank adviser market reducing by 44 per cent in terms of headcount, one must conclude that this will negatively affect a number of life companies who depended on them for new business relationships.
Lower business volumes are not the only concern. With increasing transparency of charges the annual cost of providing investment products is under increasing pressure, further threatening margins.
One of the big issues for life companies is coping with transformational change. David Ferguson, chief executive of Nucleus said: “Transformational change is a new, untested challenge for the life sector. How long did it take the established airline industry to respond to the new models of Southwest Airlines, Ryanair and such like?”
David Shelton of Stoke Bishop Associates agreed. He said: “The life sector is facing cost reductions in personal investments of 30 per cent to 40 per cent. When a business faces this level of cost reduction, it is transformational.”
A few providers have opted for non-wrap strategies and have concentrated their focus on targeted areas. Corporate business and guarantees are two areas that stand out. “Having a cost-effective, packaged and efficient solution in a strong niche area will provide opportunities,” observed Mr Shelton.
Legacy
There will be some that thrive benefiting from economies of scale and perhaps sizeable contributions from their legacy book (where it is not moving to platforms) allowing them to respond readily to adviser demands and market changes.
Others have responded by developing wrap solutions as the product of the future but this is recognised as a crowded market expecting consolidation. The wraps are focusing on price and functionality in an effort to increase market share and achieve critical mass. The emergence of adviser wraps more recently is indicative of the power-shift to advisers as they threaten the wrap margin.
For the rest of the market there is a nervous wait to see what RDR will actually mean for new business figures. The first quarter ABI-MSE stats are due out in the next few weeks and are eagerly awaited by the industry.
As Professor Porter observed, “Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.”
Richard Leeson is director of D&W Management Consulting
Key points
- Little has been said in recent statements about the impact of RDR on the life offices.
- With the bank adviser market reducing by 44 per cent in terms of headcount, one must conclude that this will negatively affect a number of life companies who depended on them for new business relationships.
- Some providers have responded by developing wrap solutions as the product of the future but this is recognised as a crowded market expecting consolidation
