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A new report* from independent market analyst Datamonitor (DTM.L) confirms that IFAs will remain the most influential distribution channel for life and pensions products in the UK, handling two thirds of sales in 2006, but the report warns that there are clouds on the horizon. Increased competition from areas such as bancassurance and multi-tie advisors are threatening key business areas, while issues such as a resistance to new technology, lack of communication between advisors and providers, and a severely inefficient business model, all suggest that the industry must adapt if they wish to survive in the long-term.
A bright future
The total number of IFA firms in the UK has increased by 17% since 2005, while total IFA firm turnover has grown by almost 10%. This is demonstrably positive growth, which looks set to continue in the future. Datamonitor forecasts that the IFA industry has a healthy long term future and continue to control both the single and regular premium pensions market up to 2010, holding around 80% and 84% of market share respectively, and dominate the single premium life market for the foreseeable future.
| Total
Life and Pensions, % share, 2006 and 2010 |
||
| 2006f |
2010f |
|
| IFA/whole
of market |
68% |
66% |
| Multi-tie |
4% |
9% |
| Single-tie |
5% |
4% |
| Single-tie
bancassurance |
17% |
15% |
| Multi-tie
bancassurance |
2% |
4% |
| Non-intermediated |
3% |
3% |
| Total |
100% |
100% |
| Source:
Datamonitor |
||
But competition is hotting up
While the IFA channel is set to continue in its overall domination of the financial advice market over the next five years, new competition is growing increasingly strong. Bancassurers have recently overtaken IFAs in terms of regular premium life sales, while multi-tie advisors are also predicted to achieve a higher market share within regular premium life sales than the independent channel by 2009. Although the regular premium life sector currently accounts for only around 15% of the total UK life and pensions market, this is indicative of growing competition in a previously unchallenged market. National IFA firms have also witnessed a decline in life assurance and personal pension sales. However, the majority of IFAs are taking advantage of new business areas, with SIPP sales quadrupling between 2004 and 2005, reassuring the industry that there are still new opportunities for growth.
Technology will make the difference
Technology will be a key issue in the race to improve profitability. Although the IFA industry has followed the main technological trends of increased speed and easier access to data, there is a general feeling that providers have failed to improve technology to make things easier for advisors, and instead are competing against each other to the detriment of the advisory industry. However, if administration is improved, the income IFAs derive through sales will have a higher impact, and will enable them to achieve high levels of repeat business through improving their communications and information systems.
However, it is feared by some that technology may eventually reduce the need for financial advice. On some insurance websites, for example, the entire term assurance application can no be completed online, removing the need for an advisor. But Datamonitor insists that the aid of an advisor is still essential. Lauren McAughtry, Financial Services Analyst at Datamonitor and author of the report argues: “Technology is unlikely to replace or reduce the advisory business by any significant margin. The industry must therefore learn to view technology not as a threat but as an opportunity.”
Trapped in an efficient business model
The inefficiency of the IFA business model threatens the future of the industry. Depolarization has led to a change in disclosure laws and an increase in transparency, forcing numbers of advisors to re-examine their business models. Effective customer targeting is needed in order for IFAs to establish their core business proposition, and how it can best be marketed to the clients. “Customers want a choice, and ultimately, the IFA market must be about service not about selling. It is precisely this characteristic that differentiates an IFA from a bancassurer or a direct sales force,” comments McAughtry.
In need of new blood
Another key issue affecting the long term future of the business is the problem of an aging profession. There are not enough new advisors coming into the market, which seriously threatens the future of the industry. Because the average IFA is a lot nearer to 55 than 25, their perspectives tend to be narrower and their goals more short-term, making them less responsive to change and less keen to take advantage of new products such as wraps, which require a long-term view. The challenge, says Ms. McAughtry, must be “to introduce new blood to the business, through a combination of recruitment and publicity, or risk the stagnation and eventual failure of the industry.”
