Manufacturers
• Are you putting off acting on the RDR proposals until they are more clear?
• Do you know how your business will survive and grow under the RDR regime (strategic view and operational view)?
• Do all your key managers know and understand what RDR will require of your business?
• Are you aiming at broad product segments or niche dominance?
• Will you be competitive… looking at product segments – distribution channels – brand strength – price – cost efficient?
• Which companies do you expect to survive/disappear?
• What is your M&A strategy (aquire or be aquired)?
• Are Platforms an opportunity or a threat to your business model?
• Will ‘Product Wrappers’ displace Provider Products?
• How many Platforms are needed and will there be expansion or consolidation?
• Do you rely on independent adviser distribution or choose to ‘own’ distribution?
• How many Product manufacturers will survive the next five years?
• What flexibility of options for ‘Fee Offset’ against the Product will your systems need to allow?
• Which fees can come from the products?
• Will the Distributor have to run multiple illustrations to show different scenarios for how fees can be taken?
• How will you manage ‘Decency’ checks?

There are many more questions than we have set out above and both manufacturers and distributors need to consider how they would answer them and what the implications are for their business. The market will change for all parties over the next five years… the survivors will most likely be those that are evaluating their position and responding now. There is no simple or right answer and the only constant will be change, but those that do not see the need to adapt, will most likely not survive.

We’ve spent a good number of weeks, talking to all the major B2B portals, gathering hard data as well as their thoughts and aspirations on how their businesses are going to respond to 2012 and RDR et al.

On the face of it, they continue to grow with Exweb from 1st – The Exchange dominating the market with 14.2 million quotations in November (our sample month), representing 61% of all quotations being run via on portals; Assureweb and Webline chasing with just under 4 million quotes and 4.5 million respectively. I was interested in acquiring data for True Potential and while their market share of quotations is low at 1½% (representing 340,000 quotes) their conversation of the quotations to electronic applications is by far the highest in the market. Currently they achieve a 3% conversion rate compared to their nearest competitor achieving only ¼%.

In an extract from our report, the graph below shows the difference in conversion of illustrations to real new business:

Now this got me thinking – there has always been an issue with portal comparison services – they are designed to proliferate individual illustrations from all the participating providers and from the portal perspective, the more the merrier. In fact, for some of the portal commercial models, the greater the number of illustrations generated, the bigger the invoice!

It is without doubt that for ‘commodity products’, comparison engines are very helpful – some time ago, I remember doing some analysis that suggested that over 60 percent of term business was ‘placed’ via a portal. I use the word ‘placed’ advisedly, because by comparison what has always eluded the portals is fulfilment (business submission). With illustration to application ratios of over 20 or even 30 to 1, it’s mightily inefficient. In fact, with the advent of advanced product provider extranet services, advisers use the portals for initial market analysis and then repeat the whole process again prior to submitting the business (as final confirmation of what has been proposed and agreed). The providers struggle to identify the effort and cost of new business acquisition against actual business put on the books. The problem is that there is no direct correlation between client data used in the pre-sale process and business submission stage.

In the past, I have written about the allure of ‘DIY’ portals. Indeed, you can understand providers, distributors and solution vendors getting together in order to provide a greater amount of process integration – a cradle to grave approach. It would appear from the data that we have acquired, that solutions which focus on the elusive STP, like True Potential, are starting to drive process efficiencies and to reduce the proliferation of pre-sales transactions that are largely ‘throw away’ effort. As I have said before, I really do believe the other portals can (and should) capitalise on this approach. In fact, there is a danger that failure to act could cause some of the other Solution Providers to build it themselves and so potentially introduce further inefficiencies.

Ultimately, what I have yet to see in any portal supplier’s solution is a complete, full-cycle, seamless, end-to-end process – one where from initial point of contact with a prospect, they are able to go through the advice, research, fulfilment submission and servicing processes completely, comprehensively and quickly – why is it so difficult?

The situation brings to mind a discussion I had with a very smart, senior board member of a sizeable life company back in the mid-90’s. At the time, we were discussing electronic new business and he was being particularly sceptical about the rate of adoption of electronic new business services. I suggested that by the end of the decade (2000), all business would be electronically submitted – he retorted that it would be2010.

He was wrong…- however, he was a lot closer than me and we are still frustratingly some way off!

The big companies have deep pockets and can, if they choose, weather difficult market conditions. They also have access to wider resource pools to help on big deliveries and have the ability to pour substantial R&D budgets into new solutions. The benefits are significant if large corporate projects with substantial amounts of bespoke development are being considered.

It would be a mistake however to think size brings with it certaintly of stability. The cost bases of larger companies are frequently a lot higher and when markets move against a company or product, then these companies may have less scope to reduce them and can quickly become vulnerable. It is particularly true when discussing a division of a larger company where the relative size compared to the overall organisation is very small. I once worked for AT&T, a huge global company, which had a reasonable presence in financial services in the UK (owning a third of The Exchange at the time). However, the relative size of the UK business compared to the US was so small that it closed the UK operations virtually overnight without batting an eyelid and leaving some clients poorly served.

Some of the smaller companies – if focused on a niche area, may actually have more domain knowledge than exists in much larger organisations and may be closer to the clients and more nimble in how they respond to market opportunities. In terms of financial longevity, some relatively small firms have a substantial user base and therefore will always be of value in the market and even if they hit hard times, a competitor may buy them to access the user base.

The bottom line is for product-based companies, I think size is not of over-riding importance, as long as a critical mass of clients is reached and as long as the company is in good financial health. If the companies product and service is compelling and the management team is sound, then success and longevity should follow. For service delivery organisations, size does become important and prospective clients would do well to check that the resources of development partners are not going to over stretched before they contract with them. So, back to the company that took offence at my comment about them being small, perhaps their repost should have been – ‘they don’t make diamonds as big as bricks’!

The FSA has traditionally focused its regulatory attention on the point of sale transactions at the end of the value chain. As most of you will know, this includes things like Key Features, Adviser status and commission disclosure, as well as rules on how performance is presented. The FSA has become increasingly concerned that this focus and potential for intervention may be too late, and could leave the door open for more ‘mis-selling scandals’, which they are determined to avoid in the future.

Dan Waters has a specific interest in tackling risk management as he is the first ‘Director of Conduct Risk’ at the FSA. As a result of his view that the regulatory focus may be too narrow, he is looking at how they look more deeply and further up the value chain to include product design and oversight by the product providers (manufacturers). In doing so, the FSA intend to look at the business models of providers to see what the core strategy and drivers of income and profitability are. They will be looking up-stream of the point of sale including product development and marketing, as well as down-stream at post-sale handling and servicing. Whilst you may think that this would be covered and motivated by the obligations of TCF, the FSA seems to be unconvinced that Providers are designing products that add customer value or address real needs. Dan Waters believes that Providers are focused on designing what can be sold, or trying to beat a competitor, rather than trying to meet the needs of the consumer first and foremost.

How will this extension of supervisory scope manifest itself? Well it would seem that the FSA will be looking to test consumer outcomes (and/or see what testing the Providers have done?). They will be looking at stress and scenario testing to see what type of customer is and isn’t appropriate for the product and checking to see if the Provider has been clear about what the product does, who it is for and if certain key characteristics such as the nature and scale of risks is properly presented. The stress testing should look at a range of market conditions that could trigger certain product features that may not be immediately obvious or expected in normal conditions. The triggering of MVAs on With Profit Bonds in the past was a surprise to some customers (and advisers!) and I expect this is the sort of area that the FSA will want to expose as a potential risk. The process should be part of a systemic and objective assessment that is built into the existing supervisory framework.

Some may fear that this interest in the product governance and design is leading to a situation similar to some EU Countries which regulate product design. Dan Waters said that this wasn’t their intention. However, it is clear that whilst the spotlight on distribution is not changing, the spotlight is going to be extended to look at the products themselves and the motives and behaviour of the manufacturers. RDR is likely to cause some Providers to redesign parts or all of their product portfolios. In doing so, they should bear in mind that the FSA is going to be keeping an eye of what they build and why, as well as how it is sold.

Well here we are, already one month into 2010 and with just under 35 months to go before the RDR deadline of December 2012! It may be that there are many out there thinking this is still a long way off and with the World Cup and the Olympic Games being ahead of the RDR deadline, some may be lulled into believing that they can put off dealing with how they should respond until a later date. However, what we shouldn’t ignore is that the FSA is not showing any sign of moving the date or ‘softening’ the requirements, and the implications of change are potentially huge. To be fair, the FSA has still got to provide the detail in a number of areas and they have been criticised by advisers and providers for not having done so more quickly. They probably deserve this criticism and whilst all parties have a tendency to be defensive, the FSA has been rightly critical of some in the industry for delaying the start of the transition process.

As we have said on a number of previous occasions, the RDR isn’t going to go away – even if there is a change of Government. And, even with 35 months to go, the size of the task should not be underestimated. From a number of our regular conversations with managers in Distributors, Providers and Technology suppliers, it is clear that some people either haven’t read, or haven’t understood the requirements and implications. Some people still think that ‘Restricted Advisers’ will be able to get some form of commission based remuneration – reasoning that with a single tie, there is no product bias influenced by commission, so it must surely be ok. Whilst it is still not entirely clear how the articulation of the charge for advice will be calculated, the FSA is still insisting that the charge will be separate from the product price, that it will not be a ‘generic’ percentage and that it will need to be explicitly identified as a monetary amount. The challenge and potential complexity will be how to account for basic salaries, bonuses (which can’t just be for selling a product), and other remuneration elements. Will large distributors (Networks and Bancassurers) be able to negotiate such significant product pricing discounts as to make it difficult for smaller firms to compete. The issue that distributors need to consider is how they will respond when the FSA provides the detail, or to consider what their preferred approach will be beforehand and then communicate that directly to the FSA or lobby their trade body now.

Given that providers cannot offer ‘factoring facilities’ will the Networks try to do so, or will we see lending facilities being made available to customers to pay the fees in the same way as we have seen the GI market use these arrangements to fund the monthly cost of premiums.

With so much attention being focused on the distributors, it is easy to forget the Providers – manufacturers – of the products. Is the ‘factory-gate’ price as simple as ‘zeroing’ the commission? Some seem to think it is… However, Providers will need to look at what options they allow for offsetting the Adviser Charge against the product. Do they offer a wide or narrow range of options – the latter could be construed as Provider influence? How are illustrations going to show the effect of the options on benefits over time? What will they do, or be expected to do when a client cancels a plan or changes adviser? How will providers identify, monitor and report against the ‘decency’ test of Adviser Charging (especially when they don’t have all the facts in relation to what has been agreed between the customer and adviser)? Will the current number of Providers be able to compete in a more transparent world of ‘factory-gate’ pricing or will we see significant consolidation? Will they focus on niche products or will they be more generalist and use their brand to support either a single or multi-tied model to distribute their products? Will it just be a case of selling existing products with minor tweaks, or will a major redesign be needed? Will different products be used via different distribution channels… less ‘bells and whistles’ for Simplified Advice routes to market? Will anyone seize on the opportunity to manufacture more Stakeholder products?

What software will be needed to support truly holistic advice, what will be the role of Platforms – something still awaiting an FSA response (commented on by Dan Waters this week). What systems will be needed to try to cater for Simplified Advice and what opportunity is there for technology to support Basic advice business distribution?

There are lots of questions and the answers are not always known or obvious. AT8 is helping a number of providers, distributors and technology companies navigate through these issues. We believe that all parties should be considering them now and not just looking at the ones they think affect them most… the decisions of others may affect the conclusions that different parties reach at a given point in time, so there is some iterative ‘what if’ thinking to take place if it hasn’t already started.

As always the food was fantastic, the entertainment (a lady with a Monkey!) was good and the networking opportunities invaluable. The focus of the night however were of course the awards themselves. These were many and varied but I thought it worth mentioning a few that stood out from a technology perspective.

The first award worth mentioning was the award for Best Software Provider. Shortlisted for this award were 1st The Exchange, IntelliFlo, Prestwood and CCL. While I have written much about Prestwood and their software Truth in the past this was always going to be a battle between the two giants of the IFA Software market, IntelliFlo and 1st The Exchange. The battle has been going on for some years and feels a bit like the best soap opera awards at National Television Awards where the winners oscillate between Eastenders and Corrie. This year the honours at the Professional Adviser awards went to IntelliFlo, with 1st The Exchange getting an honourable mention.

IntelliFlo has made big strides in the last couple of years and grown their user base considerably. As one of the first IFA software solutions to embrace the world of SaaS (Software as a Solution) and still the leading SaaS world, their award is well deserved.

The award for best Online Tool was another battle involving IntelliFlo and 1st Software. This time however they were both pipped to the post by MorningStar. I have always found the Morningstar team professional and helpful and their application is gaining some major traction in the market at the moment. Other online tools consider were the TCF Centre from FinQS, a nice customer surveying tool, Trustnet and tools from Scottish Widows, AEGON and Skandia.

The award for best data provider saw 1st The Exchange go up against Assureweb, Morningstar, Trustnet and Lipper. This time 1st The Exchange came out winners with Assureweb getting an honourable mention. AT8 are just completing our annual survey of the portal market and while we continue to be impressed with the progress Assureweb are making, it is clear that Exweb from 1st The Exchange still leads this market providing the widest coverage of products and dominating in terms of market share.

AT8 have Infoblogs (factsheets) on Assureweb, Exweb, IntelliFlo, 1st The Exchange are available in or library section.

• The proposal for an ‘Independent’ Professional Standards Board’ separate from the FSA has been changed to one that is to be a ‘subsidiary’ of the FSA
• CII and others argue that this limitation of ‘independence’ will reduce the intended increase in public confidence

• Alternative study routes to achieve QCF 4 are now being considered
• In CP09/18, there was talk of an ‘Oral’ route
• May consider ‘coursework’ or ‘practical assessment’, but it is subject to meeting a number of listed criteria, it
must satisfy the qualifications regulator and is still unclear and likely to remain so until the end of Q1 2010

• An ‘independent’ assessment of Competence may be required for advisers who are not a member of a Recognised Professional Body (RPB)
• Will we see a growth in Recognised Professional Bodies (RPBs)?
• RPBs will need to satisfy themselves that its members are competent
• Need to be careful of advisers trying to exploit any standards arbitrage between RPBs

• The FSA has published a list of ‘no regrets’ qualifications
• Still not agreed the ‘benchmark’ qualification but expect this mid 2010
• ‘Gap filling’ between the current qualification and the ‘benchmark’ qualification will be required to be completed before 2012

• FSA acknowledges that ‘consumer awareness’ is likely to see an increase in customer complaints
• Improved financial awareness should reduce ‘ignorant satisfaction’ with inappropriate advice
• TCF and regular customer review assessments should be carried out to identify and address individual or systemic issues early

• Protection business is confirmed as being allowed to operate with commission based remuneration
• ‘Pure protection’ with no investment element
• Need to be careful that ‘specialism’ doesn’t disadvantage advice in other need areas
• Although still seeking feedback, the FSA seems inclined to require the same Professional standards to be applied to Protection Advisers (QCF Level 4)
• The FSA also feels that ‘Adviser labelling’ (‘Independent’ and ‘Restricted’, should also apply to Protection)
• Protection commission needs to be disclosed

• GPP advice will be subject to ‘Consultancy Charging’ previously referred to as ‘Arranger Charging’
• The ‘Consultancy Charge’ is intended to be agreed with the employer for setting up and managing the scheme and it may be paid for by the employer or deducted from the employees GPP funds in a manner and amount agreed by the employer that is disclosed to the employee – ‘Adviser Charging’ may also apply where personal investment advice is given to individual employees
• HMRC will regard ‘reasonable’ (market cost) Consultancy Charging as ‘Scheme Administration members payment’ and not unauthorised deduction incurring tax charges
• A consequence/concern could be for employers to offset the ‘Consultancy Charge’ against the funding level and so reduce the amount going towards pension benefits
• FSA has said that it will not allow factoring by Product Providers in respect of GPPs
• There was a concern that Providers and Advisers could exploit a loophole by selecting ‘Occupational Pensions’ (not covered by FSA regulation) instead of GPPs in order to obtain commission via what is a similar benefit vehicle (differences in benefit and tax treatment were more pronounced prior to Pensions act). The FSA has said that it will seek to ban commission payment on the underlying investments to avoid this being a risk
• GPP product providers estimated between £1m and £10m of costs associated with changing their products to comply with the proposed regime
• FSA has said that it wants to stop commission for ‘Basic Advice’ linked to Stakeholder GPPs

Having had an horrific journey through snow and ice yesterday, it was pleasing to see my efforts being rewarded by it turning out to be a really interesting day, with many and varied expert speakers, ranging from IFA firms to Google UK. The theme of the event revolved around the growth of social media and the potential for financial services firm to embrace it effectively. The audience comprised one-man band IFAs, product providers and solution providers – an eclectic mix!

The presenters and topics for the day were:

Alan Stevens, the Media Coach
Successful online PR strategies for IFAs and financial brands

Jaime Steele, North Financial Management
How to build a successful Social Media and online strategy within a financial planning practice

Nicola Webber, Digital Director at The Gate
How to build a Financial Services brand with Social Media

Thomas Power, Chairman of Ecademy
Know me, like me, follow me – Why Social Media matters in Financial Services

Mike Linskey, Director of Fincision Financial Services Business Consultancy
How the internet will drive the future of financial advice. The ‘perfect storm’ creating a golden age for distributors, manufacturers and early adopters

Lee Provoost, Technology Strategy at Headshift
Social Customer Self Service in the Financial Services sector

Nick Bamford, Chief Executive of Informed Choice
Is an online execution service the big opportunity IFAs have been waiting for?

Robert Pink, Financial Services at Google UK
Marketing through a Digital Lens – using the Internet to target and communicate with your customers

What struck me was how receptive the less knowledgeable businesses were to the new (to them) concepts – there were people making copious notes.

So what did I take away from the sessions?

Well – it has become vital to have a digital marketing strategy – an integrated strategy that encompasses the conventional and the digital, that projects the image, values and proposition of your particular business. Social media is emerging as a vital part of prospect or client contact – for some organisations, as we have discussed in previous blogs, it can augment knowledge of your product or service by direct contact with your target market, both good and bad.

Will it go away? Most certainly not – with Google adding realtime content into their natural search algorithms, live, relevant information is going to be even more important; that means businesses generating engaging and compelling content as a natural part of their output. Not doing it means missing out – not getting the attention of an audience who are using social media sites more than watching television, even those who were thought to be out of the ‘internet generation’, who are incidentally, one of the biggest growth categories of services like Twitter.

So get planning now – actively research your options – it is important!

Engadget have a really good review which can be read here

But what interests me more is the way that Google has seemingly changed their strategy. Back in the nineties, when working for a product provider, there was some quite considerable nervousness about the dominance of Microsoft and the potential for them to enter into our core market and, using their consumer muscle, skew the distribution of financial services products – even software solutions like Microsoft Money were seen as a threat to the IFA sector by providing some degree of advice to clients – especially as, at the time, Microsoft Money was distributed free of charge with all new Windows PCs.

The official Microsoft line was that they were not interested in developing distribution of financial services products and their only interest was in providing enabling technologies to key industries – as time would tell, in the main that has happened – the role of Microsoft Money (now obsolete) and it’s web counterpart now called MSN Money has changed and its impact dissipated.

Now I think competition is good – in the mobile ‘phone space, Microsoft has been producing its mobile operating system for some years – it’s a bit of a ‘Marmite’ solution – some love it, some hate it. What they never did was to manufacture the hardware itself. The strategy was to nuture mainstream manufacturers, eg HTC, Hewlett Packard etc, to adopt their solution and for Microsoft to be an enabler.

Google however, seem to be on a mission – it is clear they have their sights set on core markets that have been controlled mainly by the Redmond machine (in the computing space) – web-centric cloud-based, services, new mobile operating systems, intelligent mapping, email etc. etc. spews out of Google – they are changing attitudes and causing significant disturbance. What has yet to be seen is the impact of competing directly with the manufacturers who used to be partners – it could be a stroke of genius or quite a rocky road.

We will be back with new information and updates in the New Year and hope to see you and your businesses prosper in 2010.

Best wishes from us all at AT8 (even from Mr Grumpy himself)