IFAs in the Depolarised Market - UK

Executive Summary

The Path to Depolarisation

The Supply of Financial Advice

Depolarisation and IFAs – To Tie or Remain Independent?

The Consumer

Future and Conclusions

IFAs in the Depolarised Market - UK - April 2005

Table of Contents

Introduction and Abbreviations

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

Executive Summary

The Path to Depolarisation

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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

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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?

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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

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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

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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