Thursday, 7 July 2011
They say "it is dangerous to make predictions, especially about the future". However, we can't wander into the future with our eyes closed either. So, consider these less as predictions and more as the musings of someone who spends his days wondering what the future holds, and more importantly, how one might prosper in it.
1. Government engagement in the sector will increase through bodies like the FSA and Money Advice Service.
It may that government engagement (or is that just interference) in all sectors is increasing, but it certainly looks set to increase in the financial services sector. This should probably not come as a surprise after year of mis-selling scandals and an economic melt-down still raw in the collective psyche, and it is likely to be years before these effects wear off. The effect of such engagement will to change the shape of the industry, either directly by disallowing certain types of activities, or indirectly by changing the regulatory compliance and capital costs of other activities.
2. The Money Advice Service will be reconceived and rebranded within three years.
I don't believe that the Money Advice service goes nearly far enough to solve the underlying challenge, and as a publicly funded body, I think it is unlikely that it ever could or even should. However, I also don't believe that the powers that be will give up easily. As a result, it will be declared to have failed to achieve its objectives and simply resurrected under a different name. That is ineffective, inefficient, confusing and sadly almost inevitable. (See also Does the new MAS advert undermine the RDR?)
3. The number of IFAs will reduce from about 30,000 by as much as 25% over the next three years.
This is because many will fail to qualify and/or be unable to communicate a value proposition for which customers are willing to pay. Much of this reduction will be in the form of early retirement. (See also The RDR: unintended consequences.)
4. Demand for financial solutions will continue to increase.
Consumer confidence in the industry may continue to languish, but demand for financial solutions will continue to grow. On the demand side, historic increases in longevity show few signs of abating (despite numerous predictions), increasing desires to enjoy a long and experiential retirement, and general increases in living standard and the accompanying hunger for more and better technology. On the supply side we have the steady decline of defined benefit and state pensions. It only remains for someone or something to regain consumer confidence in order to unlock this excess demand.
5. Those IFAs that remain will cluster towards the high end of the market.
With the costs of regulatory compliance and capital increasing, there will be fewer who can afford personalised face-to-face advice.
6. Technologically enabled direct propositions will creep up from the lower end of the market.
Technology is rapidly moving from the back-office into more client facing applications. This is true for IFAs who will increasingly rely on mobile applications to use in front of clients (as opposed to just back at the office), but also true for direct-to-consumer services. Customers will both demand and get richer planning tools, rather than simple price comparisons and product supermarkets.
7. Distribution will dis-aggregate with advisers focusing on financial planning and outsourcing asset allocation and investment management to specialist suppliers and outsourcing product analysis and selection to paraplanners.
As fee earning IFAs start to think more like professional services businesses, they will look to cut costs out of the value chain and achieve efficiencies through increased focus. This will ultimately result in the right-sourcing of many non-core components of the value chain, and specialist providers will develop in order to meet that need. Direct-to-consumer proposition will face similar pressures in order to bring services to consumers cost-effectively and at scale.
8. There will be a consolidation in the wrap provider market, with only a fewer of the smaller ones able to find a profitable niche in which to prosper.
There are around 30 wrap platforms on the market at the moment, but market share is concentrated in the big 3 (Skandia/Selestia, Cofunds, and Funds Network/Fidelity). Given that most advisers use only 2.1 platforms for new money flows, it's hard to see all of the smaller ones surviving. Those that don't may get bought out, morph into corporate wraps, or find other niches.
9. There will be an ongoing drive to corporate wrap, payroll and benefits administration in order to retain corporate business in the face of the RDR and NEST.
The corporate pensions sector will be the hardest hit by the RDR as large parts of this have been historically funded out of commision recouped from members contributions even though the members themselves may have received little or no personal advice. With NEST providing an easy "no-regrets" option for employers, the private sector will be looking for ways to demonstrate future value-add in this market.
Only time will tell if I am right, of course. But in the meantime, the causes and effects of these predictions can be profitably debated. What do you think?