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MP65217

MAPS INDEPENDENT FINANCIAL ADVISORS SEPTEMBER 1997

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EXECUTIVE SUMMARY

Economic conditions seem particularly benign for the remainder of this decade, with incomes rising steadily, inflation under control and consumers warmed by a feeling of increasing wealth resulting from rising house prices and building society windfalls.

Though arguments rage over the proportion of windfalls that will be spent or saved, they are certain to give some sort of boost to the savings industry. A sales opportunity has also been presented to the pensions industry in the 1997 Budget with the reduction in the value of all pension plans resulting from the removal of tax credits on dividend payments.

IFAs would seem to be in a healthy position to capitalise on such conditions. They dominate the sales of new single premium life and pension business, accounting for 60 percent of the £16.9 billion in 1996. They are also increasing their share of the regular premium market - the past five years have seen their share rise from 29 percent to 37 percent.

The running down of state provision, particularly in the pension market, offers opportunities for the IFA sector. Where the basic state pension once represented 22 percent of average male earnings, its current worth is around 15 percent of this - if the process continues, pensioners in the year 2020 can expect their state pension to be worth as little as 8 percent of average earnings. With IFAs so dominant in the pension market, there are great opportunities for their business to flourish in the future.

Changes in the number of firms and individuals working in the industry are hard to quantify because many were previously operating on an unregistered basis. Whilst the number of firms directly registered with the Personal Investment Authority (PIA) has fallen in recent years, this hides the true number of operators as many one-man bands and small companies are registered indirectly under a network banner. The number of registered individuals has remained broadly constant over the past five years.

A high proportion of IFAs have signed up with one of the major IFA networks which now account for two thirds as many as the PIA’s independently registered firms and this trend is expected to continue. The networks provide a cost efficient, administrative shelter within which individual firms can concentrate on the business of selling policies. The larger networks are also able to effectively dictate which providers their members may deal with and thus which products will be sold.

The result of this may be that non-standard customers are denied access to the products of a particular niche supplier by the pre-screening of products down to a shortlist of those most likely to fit the majority of people. Given the numbers now operating through these networks, to what extent are they giving truly independent advice?

The growth in the number of direct operators, though not impacting to any extent on share of distribution at present, offers consumers a further alternative to the IFA. Though consumers may see the direct channels as offering them convenient and ‘free’ financial advice, the fact remains that the company at the end of the telephone is still pocketing the commission on any sale without giving independent advice. This must raise the question as to whether consumers truly understand what independent advice is and, if they do, whether they require it?

The increasingly isolated presence of the Bradford & Bingley Building Society in the high street as a purveyor of independent advice highlights how few consumers positively demand IFA advice, whether this is through ignorance or apathy. Though the Bradford & Bingley seems unlikely to shed this status, given the large amounts invested in systems and training, there is certainly no movement among the other high street operators towards shedding their ties and offering independent advice.

The rise of the direct suppliers of financial products is turning many IFAs into niche suppliers catering for the upper end of the market - high value individuals or small businesses. This has led many IFAs to broaden their range of services by partnering with other professional companies to offer a one stop service. Many IFAs now offer accountancy, tax planning, wills, broking etc. as well as general financial advice.

Though the figures for direct sales are currently no more than a blip, these operators such as Virgin are establishing a significant foothold in the lucrative regular premium life market. Though the days of the IFA are far from numbered, significant challenges lie ahead for a sector that needs to convince the public that they really do require independent advice.

Text © 1997 MAPS

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