SBHD: Developments in telemarketing, combined with stricter regulations on commission, are giving financial institutions a run for their money.
The initials BFSS have historically stood for the British Field Sports Society, the agitprop organisation for the huntin’, shootin’ and fishin’ crowd. This week, you could be forgiven for assuming that they stand for the British Financial Services Society.
As of this New Year, there is a new bloodsport – the shooting of the Independent Financial Adviser (or IFA). As I write, the Personal Investment Authority’s beaters are moving through the industry’s covers, putting up insurance salesmen for the serried guns of investors. The bag could be considerable and, by the millenium, this species of game bird could be extinct – hunted to its demise with no protection, rather like birdlife in Italy.
Certainly, the countryside will never look the same again. This week brought the news that Midland Bank is the latest major institution to seek to integrate its 850-strong life insurance and pensions salesforce into its branch network. Similarly,
Halifax Building Society withdrew its 600-strong salesforce in October in the face of the new regulatory requirements. What hope for IFAs if institutions of this size cannot make a field salesforce pay?
With the optimism of a grouse that greets the morning of 12th August with the observation that at least it isn’t raining, there are those IFAs who argue that, with the departure from the field market of heavy animals such as Midland and Halifax, there is now lush feeding for the lean, fit and efficiently birdlike IFAs.
Research from actuaries Bacon & Woodrow suggests that some 40 per cent of British life offices have expense ratios that could make them vulnerable in a price war. It follows that if the burden of new regulation kills off the less competitive insurers, there will be more capacity for those who survive. Conventional wisdom has it that when the market improves, these efficient operators – and that must include low-overhead IFAs – will start to coin it because of, rather than despite, the new regulatory environment.
This is true only up to a point. The same principle can be applied to the big institution with a salesforce. That is precisely why the Midlands and the Halifaxes are consolidating their sales operations in their branch networks. They would argue, with some considerable justification, that their high street presence is a potent marketing weapon in the brave new world of life and pensions.
But this, in turn, is only true up to a point. High street financial retailers have been notoriously bad at capitalising on their network heritage. There is, among many problems, an awesome challenge to be faced in changing the autocratic culture at branch level.
What these partially true conclusions reveal is an industry locked into narrow and flabby thinking – the legacy of years of easy meat. The truth is that institutions, through the IFA market, have for far too long had a cushy time of it. Front-loaded commissions were concealed and, so long as the business was there to write (and, for goodness sake, IFAs were more than handsomely rewarded for delivering it), there was no great incentive to compete on price, except when IFAs needed their minds concentrated.
The result, frankly, has been low-grade management. There is precious little evidence that financial services managements are looking at the bigger picture. This means that some of the great financial services shibboleths are going unchallenged.
Let me take just one pertinent example. It has long been a central tenet of the financial services faith that products are sold rather than bought. In the new environment of hard disclosure, that may become decreasingly true.
According to research conducted by MORI-On Line on behalf of Merchants Business Growth Consulting, some 58 per cent of 1,000 questioned claimed to have been "proactive" buyers of life products. Even allowing for notorious revisionism in consumers’ perceptions, that is an enormous empirical contradiction of what the industry has always assumed. The industry view, as expressed in the snappily titled Costs and Benefits for SIB proposals to improve Product and Commission Disclosure in Life Assurance 1994, is that less than five per cent of products are proactively bought.
It is worth dwelling briefly on some of the other findings of this survey. Some 96 per cent of respondents listed price/value for money as very important or important, while well over 80 per cent also placed great importance on investment return and charges. Meanwhile, sales commission was seen as much less of an issue, with only 24 per cent thinking it is very important.
Now add to this consumer proactivity and sensitivity to service (rather than sales commission) a willingness to use the telephone: The Merchants research shows that some 45 per cent of consumers will use the telephone to buy a Ãº100 a month savings plan in return for a 20 per cent reduction in first-year charges, rising to 60 per cent in return for a 40 per cent reduction.
What do we get from all this? The overriding conclusion must be that the future lies in service delivery directly through the phone, rather than hand-wringing about the future of IFAs or, for that matter, high street outlets.
There is evidence that some of the rather more sharp-minded have recognised where the future lies. Indeed, Direct Line brought the future forward a few years with motor insurance. Now, it is worth noting that Richard Branson’s Virgin is establishing a joint venture with Norwich Union to sell financial products by telephone.
I particularly like the new realism reflected in the candour of Anne McMeehan, managing director of Framlington Unit Management, which recently launched Direct From Framlington, precisely the sort of phone service that accepts the challenge of the new market: "`The vast majority of the general public distrust financial institutions," she tells me. "As they rarely bother to explain what they do, it is no surprise that that there is a belief that they rip people off. In many cases – most blatantly in the insurance industry – this belief is justified."’
Yes, the new environment may well mean the massacre of IFAs. But then Jethro Tull’s seed drill put farmworkers out of a job. The future for financial services, as in so many other industries, is coming down the telephony cable. How interesting that earlier this week BT put up its rental charges.
George Pitcher is joint managing director of media consultancy Luther Pendragon.