IFA shake-up will hit Standard Life

INSURANCE giant Standard Life faces an immediate threat to the jugular vein of its business because commission-based independent financial advisers, on whom it depends, will be phased out by 2012.

Its core life and pensions operations are critically dependent on new business flowing in from commission-driven independent financial advisers (IFAs). But this sales and marketing model faces a massive shake-up with plans recently set out by the Financial Services Authority in its Retail Distribution Review (RDR) released last month.

Standard Life chief executive Sir Sandy Crombie, with retirement looming close, is trying to set the group up for the transformational decade ahead rather than preparing to wind down and clear his desk.

Around 92 per cent of Standard Life's business flows through IFAs. Informal industry estimates reckon that consumer resistance to upfront payment for advice could see up to half of all IFA firms withdrawing from the market over the next three years.

Intensifying the threat to Standard Life is that rival Edinburgh giant Scottish Widows, with its products sold through thousands of Lloyds Bank branches, may not be so severely affected and could steal a march on its close competitor.

Compounding the problem for all life offices is widespread consumer disappointment and distrust of long-term savings and investment products after the sharp falls in asset values over the past two years.

Not only have many "cautiously managed" funds fallen by between 20 and 30 per cent over the 18 months, but the FTSE100 Index is also down by 40 per cent on its level ten years ago – leaving millions of long term investors deeply disillusioned.

Crombie, in an interview with Scotland on Sunday, said: "There is a need for fresh ideas and a fresh approach for the industry going into the next decade.

"Remember where we were in 2000 with the market at 6,900 (now at 4,127.17]. We need to take greater advantage of opportunities to engage with customers and encourage them to make better use of what we can provide."

Crombie – due to bow out as chief executive as soon as a successor is found – is keen to encourage fresh thinking within the group about the values and goals that will shape Standard Life over the new decade.

He said: "All of our customer contact says to me that they want transparency and they need simplicity.

"Customers can cope with the ups and downs but they don't like being surprised as a result of opaqueness around products and charging.

"There is a serious need for advice in the post-RDR world. It need not mean the end of the advice business. Many (IFAs] have already moved to the new model, and many more can and will make the transition. Those businesses, and providers, will see the benefit of perfect alignment with their customers' interests."

"I've been here 43 years and it's never been clearer to me that people need to have greater trust in the industry. People do not believe in financial companies and products in the way they did in the past."

The long-trailed change away from commissions will see a major shift in the way that pensions and life policies are sold by "standalone" insurance and investment management companies. There will be a compelling need to change Standard Life's business model and to engage more directly and more frequently with customers. Better mail communication with customers, intensive financial education programmes and the adoption of US-style investor roadshows and seminars look likely.

The new era will also see simpler and more transparent investment products to appeal to customers who feel they cannot afford to pay a fee for advice under the new regime.

At the same time, asset management businesses will be seeking to attract high net worth customers shaken out from the private wealth departments of major banks by recent events. This should open up big opportunities for Standard Life Wealth.

The post-crash world will also bring opportunities for Standard Life through small scale, in-fill acquisitions to augment its investment operations as other companies exit their asset management businesses – once thought "core" but now deemed non-core.

Under the RDR proposals, commission payments will effectively be banned and IFAs will need to charge customers a fee – either the customer writes the IFA a cheque or the charge is made directly from the customer's policy.

Insurance market analyst Blair Stewart of Bank of America Merrill Lynch reckons the end result is that IFAs will get paid less and paid less quickly. "Estimates that 30-50 per cent of IFAs will disappear are plausible in our view," he said.

In a major research note on the industry out last week he said a smaller number of IFAs dealing with fewer companies and "unswathed by commission" will lead to consolidation amongst product providers. "Bank-owned insurance businesses will probably become less strategically important in the post-crash era." He rates Standard Life as only one of two "buys" in the life sector on the basis of its strong and resilient balance sheet and the low risk to the group's dividend.

Indeed, as a survivor company post-crash, Standard Life should be a beneficiary of a chastened public preference for resilience and durability. However, getting that message across in the coming years is going to be the major challenge.