The past 30 years have seen a dramatic change in retail financial services, from the rise of the direct salesforce to the advent of robo-advisers; from a proliferation of mutual providers to a handful of listed, consolidated product providers.
Financial products have changed too, from the reliability of defined benefit pension schemes and annuities to the rise of the Sipp and pension freedoms. There have been scandals, from the pension mis-selling scandal, when people were told that final salary pension schemes were poor value, to mortgage endowment shortfalls, the split capital trust scandal and the collapse of Equitable Life.
As the backdrop to all these changes there have been recessions and financial crises, a sub-prime mortgage meltdown and changes in technology, from the way financial advisers transact their business to the emergence of the smartphone.
The world as a whole has become faster, but not necessarily easier to deal with.
The single biggest change for financial advisers was the introduction of the Financial Services Act in 1986, the year before Financial Adviser was launched in 1987. This established the authorisation of financial advisers, be they tied, independent or multi-tied.
The Act stated that anyone carrying out “investment” business had to be authorised through a “self-regulating organisation”, which meant the Financial Intermediaries, Managers and Brokers Regulatory Association (Fimbra) or the Life Assurance and Unit Trust Regulatory Organisation (Lautro), or by default the Securities and Investments Board (Sib).
This self-regulating organisation: “Regulate[d] the carrying on of investment business of any kind by enforcing rules which are binding on persons carrying on business of that kind either because they are members of that body or because they are otherwise subject to its control.”
Industry polarisation
A consequence of the Act was polarisation, which divided advisers into tied and independent. Tied were representatives or employees of insurers or other providers. Independent advisers, who could be representatives of networks or be directly authorised, offered to advise on the entire market.
It was at this time that the direct salesforce was in full swing, one of the biggest being that developed at Allied Dunbar. Set up by a trio of South African finance entrepreneurs, Sir Mark Weinberg – who went on to found St James’s Place – Lord Joel Joffe and Sir Sydney Lipworth, the company dominated the market throughout the 1980s and 1990s.
At its peak the company had a direct salesforce of 6,000 and was a sales-focused organisation, incentivising its staff to sell its products: whole of life, term assurance, bonds and executive pensions.
Its business model was to recruit the best salespeople. Many who came through its doors went on to set up successful IFA practices or have big jobs in other firms. Famous alumni, either at Allied Dunbar or its successor, Zurich Advice Network, include: Keith Carby, Simon Chamberlain, Richard Freeman, Andy Thompson, Richard Coulson, Gerry O’Brien and David Harrison.
It also pioneered the practice buyout concept, which promised a cheque to any adviser wanting to sell his business, thereby keeping the client book out of the independent sector. The company in its current incarnation, Openwork, is still going strong as a restricted network, with SJP also one of the largest adviser businesses in the sector.
At the time of the launch of Financial Adviser, the products and payment structure sold were quite different from today. Investment bonds had become the respectable product to sell, as wrappers, ostensibly structured as life insurance, but actually acting as an investment product as it allowed cash to be ploughed into numerous pooled funds.
In those days, the independent adviser was referred to as a “broker” and he would have relationships with particular insurance companies, who would put forward their own funds for the client to invest in. On investment bonds, commission was 5 per cent, and indemnity commission was incredibly popular. On a life policy it was typically structured as 50 per cent of the first year’s premium, meaning that the life offices needed to take a long-term view of the product to make money on it.
Other popular products were endowment mortgages and with-profits funds through the 1980s and 1990s. With profits were pooled investments, but allowed smoothing along the way, and awarded bonuses on an annual basis.
But, by the early 2000s, both of these had declined in popularity; a big factor was the loss of tax relief on life assurance policies in 1984, when clients would only pay 85 per cent of the premium’s value.
Later, when the markets declined in the early 2000s, these once-popular products had become subject to mass claims of mis-selling.
The business model of the providers has changed profoundly, too. By the late 1980s, a raft of insurance companies had turned themselves into unit-linked life offices, selling investment products and insurance under the same plan. These were bankable products, geared for the long-term, with pay out of the product being 20 or 30 years later.
Turn of the millennium
By the new millennium, the market was changing again. Stakeholder pensions appeared, offering more flexibility and transparency for the consumer, but perhaps crucially bringing a charge cap of 1 per cent.
While the products as a concept did not take off with consumers, they had a huge impact on the rest of the sector, as it became apparent that the charges up to then had been excessive.
Similarly, the launch of the Pep and Isa commoditised financial products, again at cheap prices and the focus of the life offices changed. The biggest impact was that the fail-safe products paying out after 30 years were no longer as reliable or profitable as they once had been, and the life offices had to rethink their business model.
Many of them, such as Aegon and Standard Life, for example, had developed their own in-house fund managers. These became more important and more heavily marketed, while perhaps the biggest change for many of the major houses was the introduction of the platform. Depolarisation in 2005 made it clear that providers could offer third-party investment funds within their own products.
From the adviser’s point of view, the platform dramatically altered the way they served their customers, allowing them to assess a client’s portfolio instantly rather than spending days reconciling all the client’s investments on paper.
But the move to launching platforms changed the way the traditional life offices saw themselves; their business model was no longer about selling long-term insurance, but becoming administrators and managers of assets. This only continued with the advent of pensions freedoms in 2015, which allowed people to access their defined contribution pension early, and do what they liked with it.
Annuities had become another unpopular product, following the financial crisis, quantitative easing and the poor rates people received from their pension cash. By breaking the link between saving schemes and annuities, pension freedoms knocked away another plank in the long-term product universe.
Behind all of this, financial advisers have had to grapple with ever-changing government policy. Pension saving, coming with attractive tax relief, has been bound up with multiple changes, each time attempting to ‘improve’ pension regulations.
Most notoriously in recent years was pension simplification, or A Day, introduced in 2006, which attempted to replace eight pension regimes with just one, and the introduction of the annual allowance and lifetime allowance, that is, restrictions on how much one can save, and receive tax relief on this amount. These allowances are still being argued over at every Budget.
Some have claimed another change, in the late 1990s, had an even bigger impact on pensions – the abolition of the dividend tax credit on pension schemes instigated by then chancellor Gordon Brown. Brought in in 1997, it meant that pension schemes had to give up some of the dividend they received from investments.
At the time it was seen as technical tinkering with schemes that were in surplus at a time when the stock market was returning at least 20 per cent. However, as time wore on, and markets no longer produced such stellar returns, while liabilities increased as people lived longer, defined benefit schemes became an albatross around many large companies’ necks.
Savings choices
With the shift to defined contributions schemes, the onus was on the member to make the right saving choices, and hope he or she had enough money to buy a pension product at the end of it. But at the same time, for the consumer, live-for-today culture was in full swing and fewer people were seeing the benefit of saving for tomorrow.
The great and the good got their heads together and came up with the concept of automatic enrolment, ensuring that everyone had a company pension scheme to save into and, taking advantage of people’s natural inertia, getting them to automatically be signed up to the scheme unless they actively opted out.
Launched in 2012, automatic enrolment is seen as a big success, with opt-out rates minimal, although many warn that people are going to have to save more if they want to have a decent retirement.
Regulation has become a much bigger presence in the life of every financial adviser. At the time of the Financial Services Act, there was a plethora of financial services ‘regulators’ who, more correctly, were known as “self-regulating organisations”: Lautro, Fimbra, the Securities and Futures Authority (SFA) and the Investment Management Regulatory Organisation (IMRO), along with regulator Sib. By the early 1990s, it became clear, however, that Fimbra was not financially viable or particularly effective, so it merged in 1994 with Lautro, to become the Personal Investment Authority (PIA).
Super regulators
It was at this time that the first stages of what became the Financial Ombudsman Service can be seen. Colette Bowe, then chief executive of the PIA, created her own Ombudsman scheme PIAOB. This incorporated the old Fimra arbitration scheme and Lautro sub-committee and took the investment caseload from the Insurance Ombudsman Bureau. The next big revolution in financial services was the creation of a super-regulator, the Financial Services Authority, a campaign pledge from the new Labour government.
The creation of the FSA brought together the SFA, SIB, PIA and IMRO, and took over the regulation of the banking industry as well. The Financial Ombudsman Service, which swept up all the various ombudsmen under one roof, was the inevitable consequence.
Under the FSA’s aegis, advisers saw the return of the multi-tie, and then the move to adviser charging and the disappearance of opaque commissions, and the Retail Distribution Review. But, following the financial crisis, the FSA was replaced with the Financial Conduct Authority in 2013.
Perhaps the one constant over the past 30 years is the strength of the residential property market as an asset. The average value of residential property has increased from £43,000 in 1987 to £203,000 last year, showing steady increases apart from the early 1990s and during the financial crisis of 2008.
Financial advisers have weathered many storms over the past 30 years, and witnessed huge structural change in the industry. As robo-advisers start to make an impact on the landscape, no doubt advisers will adapt again, as they contemplate the next 30 years.
Melanie Tringham is features editor of Financial Adviser
Industry news timeline
1986 Financial Services Act, launching the authorised financial adviser
1987 Stock market crash – "Black Monday"
1988 Polarisation, distinguishing between tied and independent financial advisers
1989 Abbey National demutualised, sparking a wave of building societies demutualising
1990 to 1991 Recession with inflation at 9.5 per cent
1994 Creation of the Personal Investment Authority
2000 Creation of the FSA; Financial Services and Markets Act given Royal Assent
2001 HBoS created from merger of Halifax and Bank of Scotland
2006 A-Day, designed to simplify the pension regime
2004 Depolarisation, heralding the return of the multi-tied adviser
2008 The start of the financial crisis
2012 Retail Distribution Review and automatic-enrolment both launched
2013 Launch of the Financial Conduct Authority
2014 Aviva buys Friends Life, along with Sesame Bankhall Group
2015 Introduction of pension freedoms
