As UK general insurance brokers increasingly acquire IFAs, Chris Blackham offers a broker's view of the impact it is likely to have on the future of the advice market.
For years, general insurance (GI) brokers and IFAs were poles apart, due partly to their different regulatory regimes. However, since January 2005, GI has quickly been catching up, and now there is robust regulation on both sides under the watchful eye of the Financial Services Authority (FSA).
Now that the regulatory 'Berlin Wall' has come down, brokers and IFAs have been freed from a major hurdle that prevented them from working together to provide a one-stop shop for clients. While the idea of providing private and business clients with a range of financial services, GI products and advice from one source is not new, the changes in regulation have sparked a resurgence in interest in the idea of composite distribution.
At present, the issue is not regulatory but relates to how clients can best be served, and any tenable proposition needs to be built to meet clients' needs.
Since the switch to statutory regulation in the GI market, pockets of brokers and IFAs have been joining forces in various ways to develop a composite model. There are limits to this, but one of the fundamental benefits of working together concerns the economics of personal service - it is rarely economical for advisers to provide assistance to small businesses and low to mid-net-worth individuals, and these groups will increasingly struggle to obtain advice.
However, these economics change if the adviser has access to a greater range of products, as this can significantly extend its potential income sources. While this can work well for straightforward protection products, it is unlikely that brokers would advise at the more complex critical illness and income protection end.
Despite this, some believe that the regulator expects a return to composite advice and, backed with the right technology, there is no reason why a financial adviser could not be able to provide a much broader range of products. Conversely, a GI salesman could also provide a range of simple financial services products, particularly protection-based products such as term assurance, or private health insurance.
Some of these are rating-engine-driven products that enable advisers and brokers to provide on-the-spot advice to clients via a simple laptop and broadband set up. Many financial services advisers already transact business in this way, especially those who operate primarily in the mortgage arena.
Cross-selling potential
The cross-selling potential for simple products is enhanced considerably by the fact that financial advisers collect an enormous weight of information about their clients. For example, if an average GI policy requires 30 questions to underwrite, an adviser will already have comprehensive data and the client can often be put on cover simply by obtaining the answers to two or three further questions.
Obviously, financial services and GI distribution can operate as one entity, but there would always need to be two distinct divisions within the company to cater for the more complex risks on either side. While the sale of products on both sides is interchangeable, there is also the referral benefit - this is where more complex risks can be passed from a salesperson to a specialist in the business.
Further reasons for this development become evident when considering the 'flailing, old' adviser. Still heavily reliant on indemnity commission, companies that are using the old model do so with little administrative or technical support.
However, just because some advisers continue to make money out of the old model does not mean that this will be the case in future - and progressive players in the market recognise that advisers operating in this way are facing extinction on a global scale. For example, Australia is quickly adopting the new adviser model, as is the US, and it is catching on fast in the UK.
Mesh together
Meshing together financial services and GI distribution businesses has not escaped the attention of GI consolidators. In addition, another factor driving them to consider financial services distribution firms as potential acquisition targets is that, after years of broker acquisitions, options are inevitably dwindling and consolidators are having to look elsewhere.
However, broking consolidators will acquire IFAs - and vice versa - to lever existing relationships in order to cross-sell, and not only because they have run out of things to buy. Financial services acquisitions strengthen what they have built, while at the same time offering the added benefit of attracting quality clients with potential funds under management.
So can IFAs expect unstoppable GI consolidation machines to come knocking on their door?
Despite some attractive business benefits, there are some caveats at work tempering this emerging trend. One sticking point for some would-be consolidators of the IFA market is the fact that they would not be able to use their buying power to leverage commissions as they do when acquiring brokers.
Make it work
In order to make these acquisitions work, buyers must have a firm belief in the long-term value and future of the business plan. Consequently, GI consolidators looking to acquire IFAs will always focus on earnings before interest, taxes, depreciation and amortisation projections, and relate these back to multiples of renewal and indemnity commission.
Other dampening effects that may temper this development include the impending changes to capital gains tax, meaning those wishing to sell in the near future will probably have done so by April. The effects of the credit squeeze also rumble on, and consolidators reliant on third-party capital will be more risk averse in their modelling, which may slow down the current grab for market share.
It remains to be seen whether these are only temporary factors influencing this incoming phenomenon. However, to illustrate the confidence others have in this development, observe the slowing activity of the largest GI consolidator, Towergate.
For many years, it was content to buy only GI brokers but, due to diminishing numbers of quality targets, Towergate is turning its attention to IFAs. The fact that this particular firm has not only publicly stated its intention to buy IFAs, but has hired Patrick Snowball, ex-group executive director of Norwich Union's parent Aviva, is a ringing endorsement of the business reasons why GI firms should now peruse IFAs.
However, since Snowball joined, there seems to have been little progress, but this could well be the calm before the storm.
Consider carefully
For IFAs considering the future of their firm as being grafted into a GI broker or consolidator, they should be mindful that there are two approaches.
There are consolidators that bolt-on firms - an approach favoured by those building a model of scale -and there are those that integrate. With the latter, senior employees from the acquired firm often contribute to the development of the future business model, and then they will implement it.
There will inevitably be suspicion among IFAs as to how national organisations can deliver the advice customers require at a local level, and this has also been a concern for brokers for some time. However, some consolidators recognise that the combination of local advisers backed by the resources of a large organisation makes business sense.
So while IFAs and brokers have to now operated separately in the main, there are now emerging reasons why those paths will increasingly cross and intertwine. Firms that come together and agree composite care must consider what serves the client best. If they can do this and make the numbers work, it will benefit themselves, their clients and help to create a more healthy and accessible advice market for the future. n
Chris Blackham is joint chief executive officer at Venture Preference
