Retail Distribution Review – The return of “The man from the Pru”?

The results of the FSA‟s Retail Distribution Review (RDR) are now finalised. The main recommendations of the consultation paper have been left intact and it is clear that life and pension providers are going to have to make significant changes in order to implement it.

The Retail Distribution Review covers a number of areas, many primarily effecting IFAs and networks. There are however some key recommendations of the review which will have a direct and immediate impact on the market for investment products.

These recommendations are:
1. Change from commission to adviser fee charging
2. Higher levels of qualification for advisers
3. Unwinding of charging cross-subsidy for smaller investors

These recommendations proposed by the FSA will create changes within the market for regulated investment products and as a result will require product providers to react. Already, providers are reviewing the market and looking for opportunities to capitalise on their strengths in the new market-place that will emerge post RDR.

It is vital for insurers to organise their strategy for dealing with the post RDR market, as the regulations are dues to come into full force by the end of 2012 and many may come into force earlier.

While the focus of discussion about the RDR proposals has been on the affect of the changes on the IFA community, the fact that these proposals are likely to leave the mass market for financial investment products without financial advice has been glossed over.

This whitepaper looks at what we believe will be a key outcome of the RDR changes; the removal of independent advice from the mass market segment, the options that will remain to service that segment of the market and the possible re-emergence of a distribution channel that has been in severe decline for the last two decades – the direct sales force (DSF). Effect of Key RDR recommendations on the market.

The Retail Distribution Review proposes a number of changes which will lead to a radically different environment and will give rise to opportunities for providers to re-position themselves for success within the new investment product retail environment. Some of these changes will dramatically change the market for advised sales, disrupting the current landscape. If we look at the main changes we can see how a whole segment of the market is being left to its own devices, giving a big opportunity to any provider who is willing to plug the gap.

Switch from commission to fee charging

The devolution of the responsibility for adviser charges from product providers to the advisers themselves is one of the key changes that the Retail Distribution Review is making. This is a transformation for the industry, giving providers a new freedom to compete purely on their quality of their products, while the IFAs take responsibility for charging the consumer.

The effect will be to radically change how consumers perceive IFAs. The charges from the IFA will be very clear and it is widely forecast that the result will be to reduce the number of people getting advice. This is because the up-front cost will be deemed to be excessive, and is payable even if no purchase is made. Even when finance terms are available, the disclosure of the up-front cost will make the customer fully aware of the cost involved and may well put them off proceeding with the advice session.

At present, IFAs generally service the higher socio-economic sectors. The effect of more explicit charging is likely to be to move the IFAs‟ focus on to a customer base further up the socio-economic spectrum than at present, leaving an even larger segment of the population to purchase financial products without advice.

Increased adviser qualification requirements

The RDR calls for a significant increase in the level of qualification level held by advisers. As the majority of advisers do not currently hold this level of qualification, they have significant work to do to achieve this level. Undoubtedly, this will lead to a certain proportion of the IFAs leaving the industry rather than putting in the work to achieve the qualification, work which is estimated as being in the order of several hundred hours of study and costing between £4000 and £80001. For IFAs nearing retirement in particular, this would not be an attractive option.

This reduction in the number of IFAs, estimated by the FSA to be in the order of 20%2, will make it harder to get advice and the resulting reduction in competition will likely lead to increased fees, exacerbating the movement of IFA services up the socio-economic chain.

Unwinding of cross-subsidy for small investors

The final nail in the coffin for the mass market is that the need to charge for advice based on the service given, rather than as a percentage commission on the premium amount, will lead to an unwinding of the current cross-subsidy for small investors. There will be, in effect, reduced but fairer charges for larger investors and increased charges for smaller investors, more reflective of the true cost of advice.
This will also re-focus the IFAs on the higher net worth individuals, as they are likely to see the costs of their financial advice fall. Meanwhile, the barrier to getting advice for smaller investors will rise. This is also the segment that is doing the least saving and making the least provision for the future.

Mass market options

As the changes drive the smaller IFA service into the high-net-worth and ultra-high-net-worth segments, the question remains; what will happen to the mass market segment? This is the area that is least provided for by the current set-up and the RDR changes will only make this worse. As the cost of advice is driven upwards, it will become the prerogative of the wealthy, those who are usually well educated regarding financial products. Consumers on average incomes, whose knowledge of financial products is usually slight, will not be able to afford advice. In effect, those most needing advice will also be the least likely to get it.
The FSA assumption is that this market segment will be serviced by a basic advice process. This is a guided sales process, usually automated, with advisers able to assist with consumers the completing the process itself but not allowed to provide advice, even when they know that the client is more suited to a different product than the one the system is recommending.

The basic advice process is best suited to simpler products. Therefore it will require providers to create a new product set suitable for this type of consumer. This is an approach that has been tried before, notably with the stakeholder set of products and it failed to achieve its objectives.

The problem remains that financial advisers encourage investment where it is in the client‟s interest, whereas the guided sales approach relies on the individual wanting to make a purchase and initiating the process. Based on previous experience, it is unlikely that this process will increase the number of sales in the mass market segment and it is rather more likely to reduce sales.

If the customer is looking to purchase more complex products but cannot afford the cost of IFA advice, there will be the following options:

1. Execution only purchases – online or via IFAs
2. Bancassurers
3. Provider branch networks / Direct sales forces

The use of these options leaves the mass market open primarily to no advice, in the case of option one or to restricted advice in the case of options two and three.

Execution only / Online

These are non-advised sales carried out directly at the customer‟s request. The RDR proposals are to leave these sales as they are. Only the financially sophisticated should undertake execution only purchases and so they are not really suitable for the majority of consumers, who do not have the level of financial understanding to differentiate between products.

The growth of online sales of financial products direct to the consumer will continue, but this has two primary defects. It relies on individuals wanting to buy and coming to the site and secondly it requires simplified products that are mainly differentiated by price. Thus the sophisticated products available to the wealthier consumer via IFAs are withheld from this average consumer, irrespective of suitability.

Bancassurance

For the consumer, buying products via a Bancassurer gives access to restricted advice based on the range of products provided by the Bancassurer. This could be from one company or from a range of companies.
Banks have the network to penetrate the market but Bancassurance has never taken off in the UK to the extent that it has in continental Europe and there is no reason to believe that it is about to make a breakthrough, other than by default through the abandonment of the market by the IFAs.

Branch Network / Direct Sales force

Providers who have branch networks or direct sales forces have the opportunity to provide restricted advice services directly to the public. However, most providers have abandoned these channels over the last two decades. This was because they were costly to maintain and provided poor value in comparison to direct consumer sales and utilisation of IFA or partner networks.

RDR winners

It is widely held belief among IFAs that it is the Bancassurers that will be the main winners of the Retail Distribution Review. In a survey of IFAs carried out for Pinset Masons3, 68% of IFAs believed that the banks were likely to be the biggest potential winners.

But it doesn‟t have to be this way. Providers have the opportunity to relook at a direct sales force channel which will give them the opportunity to sell their products into this large market segment that is being quietly ignored by the market. The new rules for selling investment products will radically change the way a direct sales force works and will give new opportunities for success through the effective implementation of this channel.

So what makes it likely that a direct sales force or a branch network can be any more successful in the 21st century than it was in the last two decades of the 20th century?

Direct Sales Force

In the eighties, Direct Sales Forces were motivated by IFA style remuneration packages. While not giving independent advice, heavy sales-push tactics were used in order to maximise revenue. As the sales forces were motivated by sales targets, high commission levels, and low or zero salaries, this led to many mis-selling issues with inappropriate products being foisted upon unwitting consumers. They were also driven to focus on high-premium sales, in direct competition with the IFAs.

Previously, ordinary people regarded the life insurance industry as the epitome of integrity and trustworthiness, personified in the idea of „the man from the Pru‟. But today, he has been toppled from his position, washed away by a sea of scandals and sharp practice. From 1992 to 2002, the life assurance direct sales force in the UK contracted from 185,000 employees to 15,526, a reduction of over 90%.

The result of this poor reputation among consumers was a decline in sales which meant that the economics of a direct sales force providing face to face advice no longer added up.

The RDR recommended regulations are about to change all this.

The provision of a direct sales force will be a much more focused operation than in the past. No longer in direct competition with the IFA sector, they will be more like a mobile customer sales and services department.

This is because the reward structures of the DSF employees were previously arranged as a low salary with large bonuses which were completely commission based. As commission based remuneration will now be illegal, DSF employees will have to have basic salaries and bonuses driven by the quality of their sales approach as well as sales rather than the pure sales numbers used previously. This will give them a completely different focus on their sales as provision of quality advice would become central to their reward, including the provision of advice resulting in ‘no-sale’ recommendations.

The banks’ reputations have taken a hit by the widespread belief that they are the cause of the current downturn. It is unlikely that the banks top priority is restoration of their reputation among smaller retail consumers, given the problems they are facing in restoring solvency and restructuring to meet new regulatory obligations; obligations forced upon them because of the direct government investment they were forced to accept.

There is a clear opportunity for providers to re-enter this market. A direct sales force, motivated by advice quality measurements rather than sales targets, could re-engage with the consumer and re-establish the levels of trust in Life and Pensions providers that existed up until recent decades.

Carefully planned, the 21st century could see the re-emergence of ‘the man from the Pru’ as a major player in the investment product markets.

5 Ways Exaxe is Helping IT Managers facing Budget Cuts

The economic downturn has resulted in IT budgets being slashed and many key projects being delayed, postponed, or even scrapped. As a consequence how organisations are buying and implementing IT has changed – making Exaxe’s solutions even more advantageous in the following ways:

1. An immediate payback - most customers are delaying making decisions on any project that cannot demonstrate an immediate pay-back. They want to see results fast, or solve an immediate problem and they won’t just take the vendor’s word for it. They need evidence, or more to the point justification that is both quantified and verified. At Exaxe we can demonstrate an immediate payback and back it up with lots of reference customers.

2. Cutting the cost – there is widespread re-negotiation of contracts, with customers seeking to cut back on rates, project days, etc. With fewer new projects starting and increased vendor competition, suppliers have no choice but to adhere to customer requests for cost reductions. Exaxe’s solutions have always had a cost advantage – typically representing less than 20% of the traditional cost.

3. Zero tolerance for project over-runs, or delays. Tighter control of spending and more disciplined project management of all IT initiatives ranging from migration to virtualisation. Our agile methodologies for project delivery, including regular iterations, or releases, is more important than ever before.

4. Point solutions – in this present climate few IT managers and directors are out to change the world, or even their major systems. The focus has turned to point solutions, that will solve an immediate pain. Of course, these solutions must easily integrate with existing and future technologies. At Exaxe enable managers to tackle specific priorities and delivery initiatives in sequence, without a major overhaul of the back-end.

5. An end to the Big Vendor bias? ‘We only buy HP, or IBM’ is something that vendors are hearing less these days. The trend towards consolidating all technologies with a single vendor is dead. Even if this had proven successful, the budgets are not there for it at present.

Norwich Union Implements Next Generation Illustrations Technology

Illustrate Plus to support new business illustrations in European Expansion

Dublin, Ireland, February 2009. Exaxe, the specialist IT solutions provider for the Life and Pensions industry, today announced it has signed an agreement with Norwich Union International to licence and implement its next generation illustration and calculation solution, Illustrate Plus.

Maureen Breslin, Director of Operations and IT in Norwich Union International said “We selected Illustrate Plus following a comprehensive market evaluation and competitive tendering exercise. This functionally rich and innovative solution will position Norwich Union International for further growth by allowing it to launch new products quickly and to achieve operational efficiencies and customer service improvements. The flexibility, ease of integration and short implementation timeframe afforded by Exaxe’s component based Services Oriented Architecture (SOA) was key to our selection of Illustrate Plus”

Illustrate Plus is a key component within the Exaxe suite of life and pensions solutions. Illustrate Plus is a web based illustration and calculation system that supports new and existing business illustrations for all types of life, pension, investment and annuity products. Calculation parameters, screen flow and documentation requirements are easily defined by the user through the Illustrate Plus Product Development Application, allowing for the speedy launch of new products or product variations.

Philip Naughton, Exaxe’s Director, Business Development said, “We are delighted to add a growing and innovative company like Norwich Union International to our expanding list of customers. This deal follows our selection by MGM Advantage to license our administration solution, LifeCycle Plus. Our clients are proving they can launch new products faster, administer them more efficiently and respond with greater flexibility to the marketplace using our component based offering” said Naughton.

About Norwich Union International

Norwich Union International is part of Aviva, the world’s fifth-largest insurance group and the UK’s leading insurance services provider. Aviva provide security, stability and protection to 45 million customers worldwide. Norwich Union International specialises in providing tax-efficient offshore investment solutions to a broad customer base of individuals, corporate investors and trustees.

About Exaxe

Exaxe® is a specialist solution provider for the Life & Pensions industry. Exaxe helps companies such as MGM Advantage, Eureko Group and Scottish Widows launch new products faster, administer them more efficiently and respond with greater flexibility to the marketplace. With offices in Dublin and the Netherlands, we provide proven leading edge, front, middle and back office solutions, to more effectively manage product development, illustrations, channel distribution, commissions & agency management and policy administration.

Contacts Media contact
Philip Naughton Mark Houlding
Director, Business Development Rostrum Communications
Exaxe mark@rostrumpr.com
Email: philip.naughton@exaxe.com +44 (0) 777 3782 520
Tel: +353 1 2999100

The 5 Secrets of Success at MGM Advantage

Exaxe’s Invest Plus solution enabled MGM Advantage to launch a sophisticated new annuity product in just 16-week on a new platform. Most interestingly, this was achieved without a major overhaul of IT infrastructure. The 5 secrets to success were:

1. Time to market reduced

By centralising the management of the product development process, MGM Advantage reduced time-to-market for new product launches from months to days. Also, product changes could now be implemented rapidly.

2. Processes automated

MGM Advantage now delivers instant, online enhanced annuity quotes, available 24/7, 365 days a year. These quotes can be issued on the spot and can be viewed on screen and printout.

3. Processing streamlined

Applications can now be completed online with easy and intuitive data entry and no re-keying. This results in fewer errors through online validation and reduced transaction costs.

4. Improved process management

Invest Plus provides MGM Advantage with complete hierarchy management – from registration to approval and authorization – for individual agents, firms and panels.

5. Instantaneous compliance

In an industry where the burden of compliance weighs heavily, MGM Advantage now benefits from a system that ensures adherence through templates, clauses and variables for contract-specific product documentation.

Take a Look the L&P Organisation of 2012

I am going to ask you to forget about next quarter for a moment and even next year. Instead, I am going to ask you to fast forward to 2012 and to what the ‘typical life’ and pension organisation will look like.

More specifically, I would like to look under the hood of the Life and Pensions organisation of 2012, in terms of the IT systems and infrastructure likely to be in place.

Where to start? Well with the market I guess. So first, let’s look at two key predictions as to how the industry itself will change between now and 2012.

Firstly, pretty much all the industry experts predict that there will be fewer players in 2012, with consolidation occurring at a global level. I would go as far as to predict that the Western European market is likely to consolidate around less than 30 major players, with an array of innovative and specialist niche players operating at a national level.

Secondly, most people also agree that the industry’s products will be more innovative and diverse, a trend reinforced by the blurring of the distinction between the various financial products available to customers. I believe that new products will shape the future of the industry.

So, if that is the big picture – a future of fewer competitors and more products – then what is the detail in terms of the IT systems and infrastructure required by life and pensions organisations in 2012? Well, here are our predictions:

1. In line with others, we predict that over 50% of policy administration in 2012 will be outsourced, as organisations focus on customer relationships, marketing and product innovation, as opposed to administration and IT.

2. The majority of those that have not outsourced will have rationalised core systems by 2012, with mergers and acquisitions being a major factor here. However, the promised benefits of this systems rationalisation will not have materialised for many. The new systems implemented will prove to be a step in the right direction, as opposed to the total solution in terms of agility, efficiency, reporting, etc.

3. Any remaining legacy systems will be marginalised to the administration of closed and aging books of business.

4. A more agile approach to IT implementation will be employed by up to 75% of the industry with the waterfall methods becoming out-dated.

5. The industry will have got better at buying IT, adopting a much more discerning and rigorous approach to vendor and solutions selection.

6. There will be a trend towards fixed price IT and in-sourcing as well as outsourcing administration and IT services.

7. SOA will be the dominant standard within the industry.

For our part at Exaxe, we like to think our solutions, such as LifeCycle Plus®, represent the future of life and pensions policy administration today, enabling maximum process efficiency, rapid time to market for even the most sophisticated products and optimal business agility, or responsiveness.

That is thanks to true the SOA based architecture that makes it open and flexible in response to a fast changing marketplace.

Norman Carroll, CEO, Exaxe
Solutions for: Life & Pensions Administration, Product Configuration, Illustrations, Commission & Channel Management

Why Legacy Systems Struggle with New Products

The running of any L&P business depends on a range of IT systems, built up over decades.

Each individual system has a specific role to play – one for which it was specifically developed be that in the 1970s, 80’s, 90’s or 00’s.

They represent a complex coalition, sometimes uneasy, of technologies, languages and standards.

Legacy systems were written to enable organisations to compete in a life and pensions industry very different to that of today. That is why they struggle to cope with new and increasingly complex; products, channels and markets.

In particular, they struggle to speedily launch new and more innovative products.

There are 3 reasons why legacy systems struggle in terms of bringing new products to market:

1. Bringing a new product to market on legacy systems is slow and expensive because it requires complex custom development, testing and integration.

Moreover, such projects are, as is the case with any software development project, prone to delays and over-runs.

How much is expensive? Well, it is not unusual for such projects to take more than a year and result in seven figure costs!

A classic 1970s Jaguar sports car is a wonderful thing, but you can’t expect it to accelerate, handle or corner like a modern day executive saloon. The same applies to legacy systems – trying to get them to perform like a new system is not practical.

2. Because legacy systems are inherently inflexible, they generally require a compromise in terms of; administrative efficiency, service quality levels and degree of management control (information, compliance, reporting, etc.).

That means they are likely to fall short in terms of business expectations, particularly in terms of process automation and optimisation.

Anybody with enough training and instruction can dance Swan Lake, but that doesn’t mean they are going be graceful or elegant at doing it. The same applies to legacy systems, perhaps they can be re-written to handle new products, but clearly with less than optimal levels of sophistication and efficiency.

3. As is the case with code based procedural systems, once software changes have been made, they can quickly be rendered out of date by the moves of a competitor, or the changes of a regulator.

In a continually changing marketplace flexibility is a major challenge.

In too many organisations simple tasks, such as; changing the rates of calculation, or the fax number on a template requires writing, or re-writing code. But, it shouldn’t need to involve IT at all.

At Exaxe, we enable organisations to launch new products and administer them more efficiently, but without an overhaul of existing IT systems. That means significant saving in terms of costs, with solutions implemented in as little as 21 weeks.

Norman Carroll, CEO, Exaxe
Solutions for: Life & Pensions Administration, Product Configuration, Illustrations, Commission & Channel Management

Getting ‘Back to Basics’

I have been in the Life and Pensions industry for a long time – long enough to have witnessed almost the entire evolution of IT within the sector.

I remember green screens and 3.5 inch floppy disks, as well as the punch card and magnetic tape!
I have seen IT move from the margins to being absolutely essential to the daily operation, as well as the strategic direction, of every financial institution. All good, I hear you say. Well, yes and no.

Over the past decade I have noticed a trend where many Life and Pensions organisations have become more like technology companies and less like financial institutions. Others have noticed too that IT is taking more; management time, more budget and more manpower.

Many Life and Pension Companies are ‘IT Centric’

Many Life and Pensions organizations could be described as ‘IT Centric’. That is their products; strategies and budgets are being shaped increasingly by IT, rather than by the market, or the customer. From being an enabling technology, IT has taken over.

Take the issue of getting new products to market. Although clearly this should be market-driven, most organisations are only as innovative as their IT systems will allow.

For most organisations the real challenges in terms of launching new products are technical, not managerial, actuarial, marketing, or channel related.

Why is Everything a £20 Million Project?

Few people blink anymore when IT budgets cost into the hundreds of millions and projects run on for years.

But I have noticed something of a backlash beginning to appear. This is typified by the exasperation of a CFO in one of the UKs Top 5 life assurance companies, who proclaimed – ‘why does every IT project cost 20 million and require 18 months to deliver?’ ‘A very good question indeed’ I replied.

More and more L&P companies are getting ‘back to basics’. That is focusing more on what they do best – manufacturing and selling financial products, and less on IT. They are recognising that IT is not the business – IT is just the enabler.

That means managers are placing new demands on external IT vendors and internal project teams alike. With outsourcing options on the table in many organisations, decisions regarding major IT systems projects are being cast in a new light.

One positive impact is that IT vendors must focus less on selling technology and more on helping organisations achieve their business goals. At Exaxe, this is something we welcome.

Norman Carroll, CEO, Exaxe
Solutions for: Life & Pensions Administration, Product Configuration, Illustrations, Commission & Channel Management

Organizations rethink how they buy IT

As Vendor Scepticism Reaches New Heights Organisations Are Re-thinking How They Buy I.T.

Many institutions have been learning the hard way that vendor promises are not always what they seem.

Indeed, a number of high profile instances where organisations have switched vendor mid-project, has caused many IT Directors to rethink how they buy IT.

Although major IT projects often start with a blaze of publicity, their failure is generally a hushed affair.

Yet, it is a small industry and the word quickly gets around when major IT projects derail and relationships go sour.

The Risk Involved

There is a high risk of failure in selecting policy administration and related systems.

According to the ‘word on the street’ as many as 5 large life and pensions organisations have, despite major sunk investments, changed vendor over the past 18 month.

That means that if you are a large life and pensions organisation there is as much as a 20% chance of running into problems with the selection, or implementation of new policy administration and related systems.

For an industry that specialises in risk, that level of project failure is very disappointing.

Managing the Risk

There is an upside to this story however: – the way Life and Pensions companies buy IT is changing. In particular there is a strengthening of technology and vendor due diligence.

Vendor promises – buyers have heard them all before: – rapid implementation – total flexibility – seamless integration and so on – are now greeted with much scepticism. But, how to Validate Vendor Claims?

The words contained in vendor brochures, analyst reviews, or RFP responses don’t mean a lot.

Buyers are looking for the validation and proof that can ultimately only be gained by spending time with the vendor’s different customers (including those they would rather you don’t meet), and ideally by means of small scale pilot projects, or trial implementations.

The Simple Principle Applies: Try Before You Buy!
When it comes to policy administration solutions ‘seeing is believing!’

That is why, at Exaxe, we enable our customers and potential customers to pilot our systems in a wide variety of different ways.

That means seeing first-hand how our solutions can take one of their new products to market, automate key processes and integrate with existing systems. Our view is that buyers should ‘try before they buy’.

Norman Carroll, CEO, Exaxe
Solutions for: Life & Pensions Administration, Product Configuration, Illustrations, Commission & Channel Management