The launch of emfinance, an online mortgage supermarket (MW August 5), heralds a new approach to the sale and distribution of financial services which threatens to turn the industry on its head.
When it goes live later this year, emfinance will leapfrog the independent financial advisers (IFAs) – intermediaries on complex products such as investments and mortgages – and sell direct to the consumer over the Internet.
The mortgage company will be like a supermarket because it will sell a range of own-branded, co-branded and competitors’ products, just like Sainsbury’s and Tesco in the grocery sector.
It will be a subsidiary of financial services holding company The Exchange, which also plans to launch an Internet insurance supermarket next year.
Nicola Mitchell, marketing director at The Exchange, says: “We think there is terrific potential in selling broad ranges of products from a variety of providers, over the Internet. These operations have proved very popular in the US.”
A host of UK financial services providers share Mitchell’s view.
Rupert Murdoch’s new Internet holding company, eVentures, plans to set up a UK arm of US online mortgage retailer E-Loan.
Prudential’s direct bank, Egg, and Charles Schwab, the US financial services giant which set up an online execution-only stockbroker in the UK last year, also plan to open supermarkets. Schwab already has a supermarket which offers a full range of financial services products in the US.
These ventures will attempt to harness the growing shift away from IFAs towards direct distribution methods and private investment.
For many people, the &£11bn pensions mis-selling scandal confirmed their suspicion that many IFAs are not independent and are biased towards the products which will earn them the most commission.
An Office of Fair Trading recommendation to the Treasury will for the first time allow a company’s direct salesforce to offer unit trusts – a pooled stake in a portfolio of shares – from a variety of providers. The move could also speed up the proliferation of supermarkets.
Initially, these supermarkets will be Web-based and confined to offer various combinations of unit trusts, individual savings accounts (ISAs), pensions, life insurance and mortgages.
But if they take off as they have in the US, Charles Schwab believes they will soon be offering loans, savings accounts, current accounts and credit and debit cards. Eventually, they could open branch networks. In the US, Charles Schwab has 300 high street branches, in addition to its Internet service. It has plans to open 50 outlets across Europe in the next five years.
These supermarkets threaten to wipe out a large proportion of the UK’s 20,000 IFAs. They will offer customers cheaper products, delivered through a quicker and more convenient distribution channel.
It is understood that Egg, for example, will only offer “no-load” unit trusts when it goes live later in the year. These will do away with the initial five per cent fee which is normally levied on unit trusts by fund managers, in part to cover the costs of the commission they pay to the IFAs for bringing them the business.
And the lack of a costly branch network will enable the supermarkets to undercut many traditional players which only offer the brands they own.
A spokesman for Charles Schwab says the company will undercut traditional product providers: “In the US, we charge 0.7 per cent commission on unit trusts worth up to $15,000 (&£9,320) and just 0.2 per cent on anything over that. It will initially cost a little more in the UK, but still nowhere near the five to six per cent upfront charge you typically get on funds at the moment.”
IFAs are also facing new competition from within. The first direct IFA service, Sortis, is scheduled to launch later this month. It has been founded by former PricewaterhouseCoopers financial consultant Ben Goss. He says: “A lot of people have been asking for this type of service for a while and I realised it was a great opportunity which was being missed by other organisations.”
The new supermarkets and online IFAs will undoubtedly put a squeeze on traditional face-to-face IFAs – and their margins. But while they will offer extensive information on the products they offer and place them in a broader context, the new supermarkets will be “execution-only”, which means they will not offer regulated advice.
Mark Bogard, managing director of Barclays direct arm B2, says: “The key difference between the UK and the US, where investment supermarkets are very popular, is that our public doesn’t yet have the ability to decide between a broad range of financial products.
“This is partly because the products are unnecessarily complicated (although the introduction of CAT-marks – a Government seal of approval intended to denote low-cost, easy access funds – will help to change that).
“It is also partly because we are about 20 years behind the States in terms of sophistication,” he adds. “In the US, investing is a national hobby and providers invest in major TV advertising campaigns. But I believe the supermarkets will eventually become successful in the UK.”
Bogard says a third of the US population has a share portfolio, compared with just one in 20 in this country. But he adds B2 has no plans to launch a supermarket in the foreseeable future.
Malcolm Oliver, a financial services consultant and former marketing director for the life divisions of Norwich Union and Barclays, adds: “It’s going to take time for these supermarkets to take off. There is overriding evidence that customers prefer face-to-face advice. They should start by confining themselves to a manageable range of simple products with an easy back-out if it turns out they have bought the wrong product.
“The Internet has all the advantages of an ATM (automated teller machine), while giving you vastly more information – and in the comfort of your home,” he adds.
All the same, according to Datamonitor, 89 per cent of the UK population would not buy a unit trust over the Internet. Datamonitor banking and investment analyst Christine Wood puts the low figure down to a lack of product understanding and fears about the security of online transactions.
Predictions of the IFAs’ demise are perhaps a little premature. But the supermarkets will undoubtedly provide further strain for an industry on the brink of violent consolidation.