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IFAs in the Depolarised Market - UKPublished by: Mintel International Group Ltd. Published: Apr. 1, 2005 - 107 Pages Table of ContentsIntroduction and Abbreviations A new dawn for IFAs? Three-tier structure likely to emerge A continuing shift to join networks? Figure 1: IFA industry structure, September 2003 Banks seen as dominant distributor The demand for financial advice Objectives and scope of the report Global information and research Consumer research ACORN Abbreviations Executive Summary The Path to Depolarisation The emerging picture IFAs in no mood to give up their independence under depolarisation Banks set to give their customers more choice Providers see depolarisation as vital for product distribution The impact of regulation Better consumer protection Developing an efficient and competitive retail market Improving consumers’ financial literacy Figure 2: A hierarchy of financial information IFAs and financial literacy Informed customers and competition Figure 3: Level of understanding of financial products, June 2004 Depolarisation - aimed to improve competition and choice Reversing seventeen years of distribution polarisation The FSA, polarisation and consumers Improving information Depolarisation should not be viewed in isolation Mortgage and general insurance (non-investment insurance) regulation Start of the new stakeholder regime Industry unconvinced about stakeholder prospects The changing shape of the financial services industry The battle for distribution Figure 4: Factors driving industry change, 2005 The market for financial advice Figure 5: Market size of professional financial advice, UK, June 2003 IFA clients total some 11-12 million, around 40% of ‘professional’ financial advice market The Supply of Financial Advice The nature of financial advice The cost of financial advice Driven by commission ABI launches new thinking to forge consensus on financial advice Structure of the Financial Advice Industry Barriers to entry The current training and examination framework Figure 6: Financial advisers - qualifications needed Current size of numbers of financial advisers Figure 7: The market for financial advice by type of adviser, 2005 Numbers of IFA firms contracting Figure 8: Numbers of firms providing independent financial advice, 1999-2004 But IFAs’ share of key business areas growing Figure 9: IFA share of new business APE premiums, main product areas, 2000 and 2004 Scale of life and pensions sales slump unveiled in detailed analysis of product types Figure 10: Regular premium individual life business income, total and IFA-generated, 2000 and 2004 Figure 11: Single premium individual life business income, total and IFA-generated, 2000 and 2004 Figure 12: Regular premium individual pension business income, total and IFA-generated, 2001 and 2004 Figure 13: Single premium individual pension business income, total and IFA-generated, 2001 and 2004 Figure 14: Pension annuities and income drawdown, total and IFA-generated, 2001 and 2004 Weak sales of collective investments in 2004 Figure 15: Gross sales and repurchases of unit trusts and OEICs, 1999-2004 Figure 16: Estimated commission income from unit trust/OEIC sales, 1999-2004 Mortgages Continuing drop in IFA revenues over past 3 years Figure 17: Annual turnover of IFA firms and average turnover of firms, 1997-2003* Costs top the list of most pressing concerns facing IFAs Tumbling prices of IFA firms a feature of market dogged by loss making Industry dominated in numbers by small firms and networks Figure 18: IFA structure (2003) and investment intermediary industry structure, 2003 and 2005 Networks Figure 19: The leading three networks, 2005 Nationals Bank-owned IFAs Figure 20: Bank-owned IFAs, 2005 Large IFAs, regionals and single outlet operations Figure 21: Average turnover, size and productivity per client, 2005 A lack of capital What business model to follow? Depolarisation - the choices facing advisers Depolarisation and IFAs - To Tie or Remain Independent? Majority of IFAs are keen to remain independent Figure 22: Range of possible business models The case for single ties Provider-hosted best of breed approach Multi-ties - directly authorised distribution companies Whole of market advice The short term implications of depolarisation Figure 23: Estimated share of IFA sector by type of advice, 2005/06 The Consumer Seeking engagement Many are disappointed Figure 24: Reasons for regretting a financial purchase, September 2004 Consumer benefits of depolarisation questionable Consumer findings - February 2005 Product ownership Figure 25: Ownership of selected savings and investment products, by household income, February 2005 Profile of different product owning groups Big gender differences among investors Figure 26: Profile of product owning groups, by gender, age and socio-economic group, February 2005 North/South divide in investment attitudes; collective investments appeal most to the retired Figure 27: Profile of product owning groups, by TV region and working status, February 2005 Figure 28: Profile of product owning groups, by newspaper readership, new technology users and education attainment, February 2005 Types of financial advice sought Mortgage and property advice are the most sought financial advice Figure 29: Matters on which consumers have sought financial advice in last 10 years, February 2005 Figure 30: Matters on which consumers have sought financial advice in last 10 years, by gender, age and socio-economic group, February 2005 Figure 31: Matters on which consumers have sought financial advice in last 10 years, by lifestage and Mintel’s Special Groups, February 2005 Figure 32: Matters on which consumers have sought financial advice in last 10 years, by gross annual household income and tenure, February 2005 Figure 33: Matters on which consumers have sought financial advice in last 10 years, by newspaper readership and new technology users, February 2005 Sources of advice Current account provider is top of advice sources Figure 34: Source used by consumers for financial advice, February 2005 Figure 35: Source used by consumers for financial advice, by gender, age and socio-economic group, February 2005 People in London favour their current account provider Figure 36: Source used by consumers for financial advice, by TV region and household income, February 2005 Figure 37: Source used by consumers for financial advice, by lifestage and Mintel Special Groups, February 2005 IFAs most sought for pension advice; solicitors/accountants for inheritance advice Figure 38: Source used by consumers for financial advice, by type of advice, February 2005 Mortgage and property advice top advice sought among people who only seek advice from IFAs Figure 39: Source used by consumers for financial advice, by type of advice solely through an IFA, February 2005 Attitudes to paying for advice 44% of adults believe financial advice should be free Figure 40: Agreement with attitudes on paying for advice, February 2005 Figure 41: Agreement with attitudes on paying for advice (top 5), by gender, age and socio-economic group, February 2005 Figure 42: Agreement with attitudes on paying for advice (next 5), by gender, age and socio-economic group, February 2005 Attitudes to paying for advice by product groups Figure 43: Agreement with attitudes on paying for advice, by product owners, February 2005 Depolarisation What consumers who take financial advice think Figure 44: Agreement with statements on changing behaviour post-depolarisation, February 2005 Figure 45: Agreement with statements on changing behaviour post-depolarisation, by gender, age and socio-economic group, February 2005 Figure 46: Agreement with statements on changing behaviour post-depolarisation, by television region, lifestage and Mintel Special Groups, February 2005 Little difference in attitudes towards depolarisation among people using IFAs Branding and reputation most important factor in deciding on which provider or adviser to use in making long-term financial decisions Figure 47: Factors important when deciding on providers to use for long-term financial decisions, by matters on which consumers have sought financial advice in last 10 years, September 2003 and February 2005 Middle age groups (35-54) most demanding in terms of selection process Younger ABC1s most likely to benefit from depolarisation Figure 48: Factors important when deciding on providers to use for long-term financial decisions, by Mintel Special Groups, February 2005 People who have sought advice far more demanding Figure 49: Factors important when deciding on providers to use for long-term financial decisions, by matters on which consumers have sought financial advice in last 10 years, February 2005 Figure 50: Factors important when deciding on providers to use for long-term financial decisions in last 10 years, by use of IFAs, February 2005 Future and Conclusions Key features of the current operating environment that impact on future developments The industry is struggling financially Regulation is forcing people to review their business models Technology and depolarisation Cost control will ultimately be key factor post-depolarisation Too few advisers? Advertising and promotion The role of banks Providers will seek to secure distribution The distribution map Figure 51: Existing and emerging distribution choices, 2005 The growth in product demand Figure 52: Savings, investment, debt repayment and borrowing activity, Q3/Q4 2002-Q1/Q2 2005 Short term (2005-06) Medium-longer term (2006-10) Likely growth of revenues for IFAs Conclusions Far-reaching impact of depolarisation Three out of five people have sought financial advice… …but almost a half of people believe advice should be free Little sign that depolarisation set to change behaviour Will depolarisation help consumers? AbstractIn late 2003, Mintel produced a report entitled Advice and Independent Intermediaries Post-Depolarisation - UK, Finance Intelligence, December 2003. At the time of writing the report there was no firm timetable for depolarisation although many intermediaries were preparing for the new regulatory environment in mortgages and general insurance. Such pressing regulatory regime changes meant that for many firms depolarisation considerations were not such a priority although in practice the fact that depolarisation was going to happen ideally required it being viewed not in isolation, but alongside the changes in regulation, together with the forthcoming introduction of stakeholder products.As evidence of the relative importance of depolarisation, the regular PIMS survey among IFAs produced in November 2004 showed depolarisation ranked 8th in terms of current concerns compared to ‘legislation and regulations’ that ranked 4th. By contrast, in July 2003 depolarisation ranked 11th and legislation and regulations ranked 5th. The move from 11th to 8th position between the two surveys shows some increase in importance of depolarisation as an issue among IFAs, although it remains some way off being among the top three issues. At the heart of the debate over depolarisation is the question of the changing nature of financial advice. From December 1st 2004 a new era of financial advice began with the FSA’s rules on depolarisation coming into effect. These rules will be implemented over a six-month transitional period during which time all firms will need to be compliant with the new rules. Following the removal of the polarisation restrictions it will be possible for firms to offer advice from the whole of the market, from a limited number of providers, or a single provider. The FSA expects this to result in greater choice for consumers, as more firms will have the opportunity to offer a wider range of products from a variety of providers.
For IFAs, over 90% of which are small, local, one or two person firms, the combination of implementing depolarisation by June 2005 and the new basic advice regime for stakeholder ‘Sandler’ products in April 2005 will represent a major structural change in the way business has operated and force large numbers of small firms to consider their business prospects. By profile the IFA industry is characterised by a significant number of ‘grey-haired people who do not like change’. With the industry under pressure like never before, business costs have been rising and take up of investment products has been lacklustre; there is little doubt that as June 1st 2005 approaches the last minute rush to comply with the new regulations will put considerable strain on many intermediaries.
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