COST OF PROVIDING FINANCIAL ADVICE

Transcription

1 ABI RESEARCH PAPER NO 22, 2010 COST OF PROVIDING FINANCIAL ADVICE Identifying and quantifying the cost of the key components of a full advice service Report from Charles River Associates By Kyla Malcolm, Tim Wilsdon and Charles Xie

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3 COST OF PROVIDING FINANCIAL ADVICE EXECUTIVE SUMMARY Charles River Associates (CRA) was commissioned by the ABI to conduct research into the cost of providing financial advice. The aim of the research is to identify the key components of a full advice service and to quantify the time and costs associated with each individual component. This also enables us to set out the minimum value of premiums that can be profitably served and the associated market size of potentially profitable customers. Components of the financial advice process Figure 1 below provides an overview of the activities involved in each stage of the advice process. Figure 1 Overview of the advice process Lead generation Pre - initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Prospecting Arranging initial meeting Preparation for initial meeting Travel Disclosure Fact find Gathering documents Confirmation of services Review of products and providers Development of suitability report Travel Reaffirm client status Present recommendations Product related disclosure Product sale administration Documentation checking and processing Post - sale administration Advice related administration Source: CRA. Time taken to provide financial advice On average across all channels, the advice process for a new savings and investment customer takes around 7 hours and 40 minutes although there is considerable variation between different channels. Banks complete the process in 4 hours and 20 minutes on average whereas small and network IFAs take 8-9 hours and national IFAs take around 14 hours. (Comparisons based on time need to be treated with care as out-sourcing and overheads are not included and may vary between channels. These will only be captured in comparisons of costs rather than comparisons of time.) It is important to note that the research focuses on typical clients for each adviser type rather requiring all firms to consider a standardised customer. The former approach is advantageous as it captures data on real customers and hence is more likely to be robust. One of the implications of this is that differences between channels will partly reflect differences in the types of customers using these channels. 3

4 Time to provide financial advice (minutes) ABI RESEARCH PAPER NO 22, 2010 Figure 2 Time to provide financial advice for savings and investments by adviser type Small standalone IFA Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Travel Source: CRA calculations. The estimate of time above includes the time taken by all staff in the advice process including advisers, paraplanners/branch staff and administrative staff. One of the findings of the research is that there are substantial differences between channels in the use of non-adviser time. These non-adviser staff are particularly used by IFAs for the preparation of recommendations and the post-decision administration (neither of these are client-facing activities). Over half of the time spent in national IFAs is by non-adviser staff. National IFAs are found to have significantly greater emphasis on post-decision administration and compliance than other firms. They conduct a lot of file checking and require advisers to complete a check list of tasks before the process can be considered complete. For network IFAs, the network itself conducts checks on documents reducing the amount of time that the adviser spends on this activity (with the impact of this captured when the process is examined in monetary terms). Smaller IFAs spend less time on these activities than nationals. For banks and direct sales forces, there is limited use of non-adviser staff because of the extent to which technology is used instead. These systems enable bank based advisers to automate the product selection based on information from the fact find, substantially reducing the amount of time necessary for this step. Direct sales forces similarly save time through investments in technology and because the nature of tied advice means they do not need to search across providers. In some cases this may also reduce the search across products since they will only be able to recommend the products that are in their range. It is important to be careful in the interpretation of the results and it should not be assumed that differences between channels reflect differences in efficiency because: 4

5 COST OF PROVIDING FINANCIAL ADVICE Advisers could be providing different services indeed IFAs are offering an additional service in comparison to tied channels through searching the market; Advisers could be offering different quality for example, there is evidence from interviews that national IFAs are placing considerably more emphasis on administration and compliance than other IFA firms; and Advisers could be serving different customers interviewees indicated that clients using IFAs had more complex needs than those using banks. Time by customer The time taken for both small IFAs and national IFAs to serve existing customers is 2 hours less than for new customers. 1 Network IFAs and direct sales forces both save over 1 hour, but banks save only 30 minutes when dealing with existing customers. The relatively limited savings by banks reflects their extensive use of technology and a highly system driven advice process such that when serving an existing customer the adviser will go through broadly the same process as for a new customer. For IFAs, considerable time savings are made for existing customers. This reflects: A faster fact find which focuses on changes rather than starting from scratch; A reduction in the number of meetings with clients; Faster preparation of recommendations as existing clients are less complicated because IFAs have already got their affairs into some form of order; and Faster administration as client information is already captured on systems. Time by product In all channels the time taken to conduct advice is shortest for protection products and longest for pensions. 1 It should be noted that new customers represent customers that are new to the particular advice business. They are not necessarily customers who are new to advice or those who are new to taking out any of the products considered in this report. Similarly, existing customers are customers who have already received advice from the particular advice business. 5

6 Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Time to provide financial advice (minutes) Pension Protection ABI RESEARCH PAPER NO 22, 2010 Figure 3 Time to provide financial advice across channels by product type Small standalone IFA Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Source: CRA calculations. Pensions took slightly longer to advise on than savings and investments, ranging from 10 minutes longer for small IFAs to 60 minutes for network IFAs. The increase in time arose due to the activities involved in the preparation of recommendations. When examining the weighted average time to provide advice across channels, pensions take around 2 hours longer than savings and investments. This mainly reflects the fact that pensions are primarily distributed by IFAs. Hence the weighted average picks up not only the increase in time in each individual channel but also the increase in the proportion of pension sales conducted by IFAs (where the advice process takes longer). Providing advice on protection products is considered less complex compared with other products as it is considered relatively easy to identify the client s needs and explain this to them, and information on the price of protection products is readily available online. On average the time taken to advise on protection products was around 50 minutes less than that for saving and investments. Costs by product As well as examining the time taken for the advice process, we convert this into monetary terms taking into account the cost of time for different types of staff, the cost of overheads and an estimate of average profitability. It is also important to take into account the fact that advisers spend some time advising customers who do not purchase a product. If these customers do not pay for the services then these costs would need to be covered through the sales which are successful. 6

7 COST OF PROVIDING FINANCIAL ADVICE Table 1 Cost of advice ( ) Product Successful sales only Cost taking into account unsuccessful sales Saving and investments Pensions Protection Average Source: CRA calculations. The average cost of advice for successful sales is estimated as 510. account the unsuccessful sales increases this figure to 670. Taking into Minimum case size Based on the cost of providing financial advice and average commission rates calculated by the FSA, we estimate the minimum case size that would be necessary for the commission generated to meet the costs of providing advice. Across all product types, customers making regular contributions would need an average annual contribution of 2,310 ( 193 monthly), while customers making a lump sum investment would need to be able to invest 10,300. Accounting for unsuccessful sales increases the minimum case size to 3,080 ( 257 monthly) for regular contributions and 13,730 for lump sum investments. Some advisers would be willing to take on new customers with small value investments even if customers would not be immediately profitable. This is partly explained by their expectation that these customers would become profitable in the future. Potential market size by product Having identified the size of premiums for which advice can be profitably provided, we also assessed the potential market size associated with these levels of contributions i.e. to consider the number of customers that might be able to make investments of the necessary level (not the customer who would be willing to make these investments). 7

8 ABI RESEARCH PAPER NO 22, 2010 Table 2 Population size (millions) Successful sales only Taking into account unsuccessful sales Regular contributions Collective investments Pensions Protection Lump sum investments Collective investments Investment bond Pensions Source: CRA calculations. Overall we find that when taking into account the costs of unsuccessful sales, around 9-12 million customers could be profitably served for most products although this figure falls to around 1 million for regular contribution pensions. 8

9 COST OF PROVIDING FINANCIAL ADVICE CONTENTS 1.0 INTRODUCTION Background on the market Methodology Structure of the rest of the report Components of the financial advice process Prospecting / lead generation Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Time taken to provide financial advice Time by activity and adviser type Time by customer Cost in terms of time by products Regulatory requirements and good practice Cost of advice Monetary cost of advice Minimum case size by product Potential market size by product 51 LIST OF FIGURES Figure 1 Overview of the advice process 3 Figure 2 Time to provide financial advice for savings and investments by adviser type 4 Figure 3 Time to provide financial advice across channels by product type 6 Figure 4 Overview of the advice process 17 Figure 5 Figure 6 Time to provide financial advice for savings and investments by adviser type 25 Time to provide financial advice for savings and investments by adviser type and staff 26 Figure 7 Average time for initial meeting across all channels (minutes) 28 Figure 8 Time on preparation of recommendations 29 Figure 9 Time to present recommendations 32 Figure 10 Time for post decision administration 33 Figure 11 Travel time 34 Figure 12 Client-facing and non client-facing time by channel 35 Figure 13 Time to provide financial advice across channels for new and existing customers 36 Figure 14 Time to provide financial advice across channels by product type 39 Figure 15 Monetary cost of advice by product and channel new customer 44 Figure 16 Monetary cost of advice new and existing customers 46 9

10 ABI RESEARCH PAPER NO 22,

11 COST OF PROVIDING FINANCIAL ADVICE 1.0 INTRODUCTION Charles River Associates (CRA) was commissioned by the ABI to conduct research into the cost of providing financial advice. The aim of the research is to identify the key components of a full advice service and to quantify the time and costs associated with each individual component. The research seeks to identity: how the cost of full advice varies by the types of adviser, customer and product; the size of the market for which it is economic to provide full financial advice (as measured by a minimum case size that can be profitably served) under the current regulatory regime; and market segments of potentially profitable customers. The ABI was keen to understand the activities involved in the existing advice process and gain a detailed assessment of the current time taken for these activities. Providing a detailed breakdown also enables the ABI to assess the time taken for those activities that may be particularly affected by regulatory changes such as those introduced by the Retail Distribution Review (RDR). 1.1 Background on the market The ABI requested that this research cover three different types of products: Savings and investments such as investment bonds; Pensions such as personal pensions and individual stakeholder pensions; and Protection such as term assurance, income protection and critical illness. It is worth noting that there are differences between the distribution channels that are commonly used for each product as shown in Table 3 below. 11

12 ABI RESEARCH PAPER NO 22, 2010 Table 3 Distribution channels by product and premium type Small IFA Network National Banks Direct Total IFA IFA Sales intermediated premium ( million) Regular premium Investment and savings 5% 4% 7% 57% 26% 650 Pension 26% 21% 32% 7% 14% 2,727 Protection 17% 14% 21% 39% 9% 802 Single premium Investment and savings 16% 13% 20% 40% 11% 24,819 Pension 27% 22% 34% 5% 13% 14,187 Protection 21% 18% 27% 34% 0% 185 Source: ABI Statistics 2009, Matrix IFA data and CRA calculations. Note: The IFA figure from the ABI has been split between different types of IFAs in proportion to turnover figures for these types of IFA from Matrix IFA data. The figure for direct sales has been calculated by deducting the figure for banks from the single tied figure. It is clear from Table 3 that the distribution of products varies between both products and premium type. The table shows that pensions are mainly distributed via IFAs with a much smaller proportion of pensions sold through banks and direct sales forces. This result is also consistent with the evidence found during the discussions with advisers in the banking channels and direct sales forces who indicated that selling pensions would be far less common than selling investments or protection products. It is important to bear this in mind when considering the results for the tied channels for pension products. We use the figures from Table 3 to calculate the averages across different distribution channels for various figures presented in the report. 1.2 Methodology The project had three main stages which are explained below Setting out activities in the advice process The first stage of the research work involved setting out the main activities that are undertaken during the course of the advice process. Initial interviews with a small number of advisers were then used to refine the set of activities and to ensure that we had a clear understanding of the components of each activity in more detail. The full set of activities is set out in Chapter 2. Discussions with advisers indicated that the most appropriate method of collecting information regarding the cost of the advice process would be to focus on the amount of 12

13 COST OF PROVIDING FINANCIAL ADVICE time taken for different stages and then to convert this to a monetary cost through additional information such as the cost of advisers time and overheads. It was also identified during this stage of the work that firms use different business models and it would be important to understand the degree to which activities conducted by advisers in some firms are conducted by paraplanners and administrative staff in other firms. The output of this stage was to have a structured method of information collection that focused on the time taken to conduct activities and which could be used for advisers working in a variety of different types of channels and using different business models Variation by advisers, products and customers Although the process of providing financial advice is broadly the same, the actual activities and level of the associated cost can be very different across: The types of intermediary; The types of customer; and The types of products. Variation in costs by intermediary The costs of full advice could differ substantially for different types of intermediaries for a number of reasons (independent of their focus on particular product types or customer types), including: Economies of scale could allow larger firms to spread cost across more customers; Technology can be used to substitute for time spent by advisers; Non-adviser staff (who are cheaper) could be used to conduct some activities instead of advisers; Firms may undertake different activities in-house compared to outsourcing e.g. compliance may be provided by third parties; and Firms offer different services such as offering restricted advice or searching across the whole market. The costs are therefore expected to vary depending on the type of firm involved. Information was gathered for the following types of firms: Small IFAs these are standalone IFA firms with less than 10 advisers; IFAs using network services networks provide certain activities such as research services or compliance and regulatory services on behalf of advisers; National IFAs these are large IFA firms who have a wide coverage across the country; Direct sales forces these are sales forces that are tied to a particular product provider; and 13

14 ABI RESEARCH PAPER NO 22, 2010 Banks we focus on the tied sales force within banks rather than any in-house IFAs that might also be available through the banking channel. 2 Variation in costs by customer Costs would also be expected to vary depending on whether the customer concerned is a new customer for the business or an existing (repeat) customer with an established relationship with the financial adviser. 3 For example, it may not be necessary to undertake a full fact find for existing customers but rather to focus on any changes since the customer s previous review. Similarly, customers who have built up a relationship of trust with their adviser may be more willing to receive the recommendation by post or rather than seeking a second meeting. There could also be a different split of new and existing customers between different channels that impacts costs. For example, IFAs may be more likely to have ongoing relationships with clients over many years whereas other channels may be more likely to have new customers. One of the methodological decisions that was taken during the course of discussions with the ABI was to focus the research on typical clients for each adviser rather than to request that all firms consider a standardised customer. The former approach is advantageous as it captures data on real customers and hence is more likely to be robust. However, it is important to recognise that resulting differences by channel will therefore reflect differences in the types of customers which are typical in these channels. For example, it was generally agreed that customers using IFAs tended to be more complex in their existing products and needs than customers using banks or direct sales forces. Hence we would expect to observe differences between channels which reflect these different customers. Variation in costs by product As noted, the ABI requested that the research identify the cost of the advice process for different products: savings and investments; protection products; and pensions. Given that there are substantial differences between individual business and group business, after discussion with the ABI, the research was focused on individual business and does not seek to address costs associated with group products. The cost of some categories would be expected to vary between different products (such as the complexity of identifying the appropriate provider) while in other categories, costs would be expected to be invariant to the product under consideration (such as the cost of initial disclosure). 2 3 In some cases the advice service might be offered by a provider different to the owner of the branch network. It should be noted that new customers represent customers that are new to the particular advice business. They are not necessarily customers who are new to advice or those who are new to taking out any of the products considered in this report. Similarly, existing customers are customers who have already received advice from the particular advice business. 14

15 COST OF PROVIDING FINANCIAL ADVICE It is important to recognise that in many cases individuals will not be approaching their adviser with a desire for a specific product but rather will frequently seek holistic financial advice at key life stages or advice resulting from some change in personal circumstances e.g. an inheritance or redundancy payment. One of the implications of this is that obtaining costs associated to one particular product may lead to an overstatement of costs because in practice some costs will be shared across multiple products Interviews and gathering of cost information The third stage of the assignment was to conduct interviews with a variety of advisers from different channels to collect cost information. Since one of the aims of the research was to ensure that there was a good qualitative understanding of the different elements of the advice process, it was agreed with the ABI that the most appropriate manner of conducting this stage was through a series of in-depth structured discussions with advisers. Hence it should be noted that the results do not purport to represent a large sample of the advisory community but rather seek to provide a qualitative understanding of the advice process and how this varies between channels, customers and products. Table 4 sets out the total number of interviews that were conducted between November 2009 and February 2010 and on which the results are based. Table 4 Number of interviews Category Number of interviews/completed surveys Small standalone IFA 6 Network IFA 6 National IFA 4 Banks 6 Direct Sales Force 3 Other 5 Total 30 Source: CRA. The category other refers to interviews which were conducted with a variety of individuals representing: network or national head offices; product providers; and service providers. Evidence from these discussions has been used in quantifying certain elements of the advice process (such as the cost of network services or the cost of outsourcing certain activities) and in understanding some of the qualitative differences between channels. 1.3 Structure of the rest of the report The rest of the report is structured as follows: Chapter 2 sets out detailed information on the different activities which are contained within the full advice process; 15

16 ABI RESEARCH PAPER NO 22, 2010 Chapter 3 provides the results of our analysis in terms of the amount of time that it takes for the advice process to be completed. This information is provided for different channels, new and existing customers and products; and Chapter 4 translates these results into a cost of advice in monetary terms and then examines the minimum case size that could be served in order to cover these costs. 16

17 COST OF PROVIDING FINANCIAL ADVICE 2.0 COMPONENTS OF THE FINANCIAL ADVICE PROCESS Before considering the cost of financial advice it is important to set out what is involved in providing such advice. The first step in the project was to establish the different activities in the advice process. It is useful to break out the activities in this manner for a number of reasons including that doing so: aids understanding of where differences in cost reflect different activities being undertaken; allows for consideration of how different activities might be affected by changes in regulation; and facilitates questioning, allowing us to test the credibility of the responses. Figure 4 provides an overview of the activities involved in each stage of the advice process. Figure 4 Overview of the advice process Lead generation Pre - initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Prospecting Arranging initial meeting Preparation for initial meeting Travel Disclosure Fact find Gathering documents Confirmation of services Review of products and providers Development of suitability report Travel Reaffirm client status Present recommendations Product related disclosure Product sale administration Documentation checking and processing Post - sale administration Advice related administration Source: CRA. In the rest of this chapter we provide further detail on what is involved in these different stages of the process. We also describe where financial advisers undertake the majority of the activities, and where other staff may be involved (this is discussed in detail in Chapter 3). 2.1 Prospecting / lead generation Before the individual advice process can begin, advisers conduct prospecting or lead generation activities to identify and contact potential customers. The most timeconsuming activity in this stage for most advisers is face-to-face meetings with potential clients. Often advisers have to conduct multiple initial meetings with potential clients in order to obtain one client who goes through the whole process to completion. Other activities at this stage are often focused on direct marketing to potential clients. In larger firms, marketing of this kind may be carried out by administrative staff or specialised marketing teams rather than the adviser. Technological advances such as the increased use of electronic communications have changed the nature of marketing. 17

18 ABI RESEARCH PAPER NO 22, 2010 Many smaller firms report that they conduct little prospecting activity, relying instead on referral arrangements (especially from other professional services providers such as accountants and lawyers), recommendations by existing clients and ongoing advice for existing clients. Since this activity is not part of an individual advice process, the costs of undertaking lead generation is not captured in Chapter 3, which considers the time taken for a single advice process. Instead this is captured in Chapter 4, which takes into account the other costs involved in undertaking the advice process. 2.2 Pre-initial meeting This stage mainly involves two activities: Arranging the initial meeting; and Preparation for the initial meeting. Arranging the meeting may be done by administrative staff and often this will also serve as an opportunity to identify why the client is seeking financial advice at that particular time. Financial advisers (who always conduct the initial meeting) may need to prepare materials for the meeting. For new customers this may involve preparing some general marketing presentation materials advisers often have a new customer pack that they give to clients. For existing customers, advisers will typically review the current value of existing products. The time needed for this has reduced over time due to the increased use of technology and platforms making information more easily available online. 2.3 Initial meeting The next step is for advisers to meet with the client and this involves a number of different elements which we set out below. Travel The initial meeting is mostly conducted face-to-face (although there are some exceptions to this for some firms or for some existing customers). The extent to which advisers, rather than clients, do the travelling varies between firms with for example, branch-based advisers commonly expecting clients to travel to them. 4 Disclosure Whether the first meeting is in person, by telephone or in writing, the adviser must start the meeting by providing information to clients with regard to their service offering and 4 It is important to note that our estimates of the cost of advice focus solely on costs to the industry, However, customers will also face costs (in addition to paying for the advice) such as from the time they spend with an adviser or travelling to meetings. 18

19 COST OF PROVIDING FINANCIAL ADVICE charges. They must inform the prospective client of their status whether they advise on products from the whole of the market (independent), from a limited range of product providers or from a single company (tied). 5 They also need to inform the client of the basis on which the firm will charge for their advice whether it is fee-based, commissionbased or a combination of both. The RDR will require that advisers move to using adviser charging in future. 6 Disclosing information on status and on charges are usually intertwined in the same discussion so that advisers can explain their charges in the context of the services that they will be providing. For this reason we do not provide separate information on these two elements. Fact find The fact find dominates the initial meeting. This is used as the method of collecting information about the client so that the adviser can understand the client s financial situation and objectives, ensuring that the adviser can then analyse the financial needs of the client and make recommendations accordingly. The fact find forms the foundation of the subsequent steps so advisers spend a significant amount of time on this to make sure that they have accurate and relevant information. Advisers collect information in three areas: personal details; financial details; and planning and objectives. The first two areas are often colloquially referred to as hard facts as they cover factual information on the client and the last as soft facts as it is mostly about what the client is seeking to achieve. Gathering personal details involves obtaining the client s basic information such as family details and employment status. In respect of financial details, the adviser needs to understand existing financial assets and liabilities. Many advisers will ask clients to provide a monthly income and expenditure estimate enabling the adviser to assess cash flow and the disposable income that might be available for investment. Assuming that investment products may be appropriate, advisers need to understand the client s attitude to risk which is typically done through a series of carefully designed questions to reveal this information and then confirming the implications with the client to ensure that is what they would have expected. In the last section on financial planning and objectives, the adviser needs to understand what the client is seeking to achieve such as saving for a house purchase, funding their children s education through school or university, or for retirement. 5 6 Advisers need to provide the option of paying for the advice via fees if they are to qualify as an independent financial adviser. See FSA, Distribution of retail investments: Delivering the RDR feedback to CP09/18 and final rules, Policy Statement 10/6, March

20 ABI RESEARCH PAPER NO 22, 2010 Although the actual fact find process may be similar in different firms, differences arise in respect of how the information is gathered. Some firms tend to use IT driven processes with fact finds being completed electronically during the initial meeting. Others report that they prefer to use a hard copy fact find arguing that an electronic fact find creates a barrier with clients who cannot observe what information is being written down and may be reluctant to have financial information captured electronically (even though most advisers do this eventually). Part of the role of the initial meeting will also be to build a relationship of trust with the client, rather than limiting it to the functional aspects of collecting information. 7 Advisers report that this takes time hence, while advances in technology could help advisers save time on this part of the meeting, they may still want to spend a similar amount of time with the client in order to build this trust. 2.4 Preparation of recommendations It is in the preparation of recommendations stage that a number of firms will use staff such as paraplanners or administrative staff to conduct some of the activities. Gathering documentation After the fact find, advisers may need to collect documents on the client s existing products. The process followed (and whether documents are gathered at all) will depend upon the nature of the client s needs and complexity. For clients expected to seek longterm ongoing advice, or those where the advice is inherently linked to existing arrangements such as pension transfers, documents would need to be gathered. In some cases the client would bring the necessary documents to the initial meeting while other clients would be asked to sign a letter of authorisation enabling the adviser to obtain documents directly from product providers. (Many advisers believe this is more efficient and ensures the information is up to date.) By contrast, clients who are considered transactional would be unlikely to be asked to provide evidence of existing arrangements or to sign an authorisation letter. As well as gathering documents from the client, advisers will also need to gather documents from product providers so that these can be given to the client. The availability of information online has reduced the time taken in this step compared to in the past. Confirmation of services to be provided / engagement letter After the initial meeting, some advisers require a signed engagement letter from clients to confirm that they would like to proceed with the process. This is most commonly required by fee based advisers who want client agreement in order to ensure that they will be paid 7 In some cases, the fact find would also reveal that the adviser may need to recommend the client to an alternative adviser. This would be relatively common in respect of pension transfers relating to complex pension arrangements or in banking channels where more wealthy clients may be directed to in-house IFAs rather than tied advisers. We do not consider these examples further. 20

21 COST OF PROVIDING FINANCIAL ADVICE for any time spent on the client s behalf. Other advisers may not send out an engagement letter or may simply set out what has been discussed and how they will proceed without requiring a client signature. Review of products and providers suitable to meet consumer needs The next significant step after the first meeting is for the adviser to analyse the client s financial needs using the information collected from the fact find. The adviser will then be able to consider the products which are suitable to meet those needs. Different advisory businesses will use different approaches in this step of the process. In some IFA businesses, paraplanners will be used to conduct the initial review of the appropriate products with the advisers checking the recommendations and altering them as necessary. For other businesses, technology is used to narrow down the products appropriate to client needs. The extent of search which occurs during this stage depends on the type of adviser. Independent advisers need to search across providers from the whole of the market (although in practice many firms will select providers from an existing panel which is itself reviewed on a regular basis). Alternatively, tied advisers only need to consider the type of product that is suitable for clients but do not search between different providers. Development of suitability report The recommendations for the client will ultimately be delivered through a written suitability report which includes a brief summary of the client s financial situation, the analysis by the adviser of the client s financial needs, the products and providers recommended and the reasons for the recommendations. Depending on the business model, financial advisers can sometimes delegate activities to support staff and paraplanners in constructing this report. It is also worth noting that although we have included the suitability report under this stage of the process, a number of interviewees stated that they would not construct the report at this stage. Instead, they would compile the formal suitability report after they had presented the recommendations to the client and once it is already clear how the client intended reacting to the recommendations. 2.5 Presentation of recommendations After compiling the recommendations, most typically the adviser will meet the client again and present the recommendations to them. Some advisers will send the report to the client before the meeting, especially when the client is an existing customer. The presentation consists of three parts (described below), although in practice the second two parts are highly interrelated and cannot be distinguished clearly. 21

22 ABI RESEARCH PAPER NO 22, 2010 Reaffirm client s financial status and objectives The adviser usually starts the presentation by checking whether the client s financial status and objectives remain unchanged since the first meeting. This is to ensure that there have not been any sudden changes to personal circumstances which may alter the validity of the recommendations. Present recommendations Advisers generally spend significant time talking the customers through the recommendations usually by explaining the suitability report (assuming that this has been prepared). This ensures that the client acknowledges his financial situation, fully understands the analysis of financial needs and any gaps that have been identified, why particular products and providers are selected and the associated costs. Product-related disclosure Product specific disclosure typically involves explaining the key facts document to clients. Many advisers combine this section with the previous section in presenting the suitability report and overall recommendations. Since these two steps are typically integrated we do not separate them out in the analysis of time and costs. 2.6 Post decision administration After the presentation in the second meeting, if the client is satisfied with the recommendations and would like the adviser to proceed with product purchases, the advice process then enters the post decision stage which includes: Product sale administration; Documentation checking and processing; Post-sale administration; and Advice-related administration such as invoicing. Product sale administration work is often carried out by administrative staff rather than advisers. Depending on the firm and the product, some firms will complete the great majority of application forms leaving the client to provide a signature; other firms will ask the client to complete at least some sections of the forms to ensure the client understands what is going on. As well as administration which is conducted to enable clients to take out the relevant products, administrative checking also arises on the advice itself. The checking includes two aspects: whether the recommendations are suitable for the client and whether there are any mistakes in the documentation. Some firms check all the documents that go to the client before they are sent out. Other firms selectively check cases with more emphasis put on inexperienced advisers or complex products (pension transfers and structured products were frequently mentioned during interviews). The actual checking process varies considerably between different business models. 22

23 COST OF PROVIDING FINANCIAL ADVICE Firms offering ongoing services tend to spend more time on post-sale administration than those who are not. They may call the client to check if he is satisfied with the service. Firms who are paid on a fee basis would also have to undertake administration related to payments of their fees, while those paid through commission may need to spend time reconciling payments from providers. 23

24 ABI RESEARCH PAPER NO 22, TIME TAKEN TO PROVIDE FINANCIAL ADVICE In this chapter we set out the data we have collected on the amount of time spent on advisory activities and discuss the differences by advisers, customers and products. The next chapter considers the advice process in terms of the monetary cost associated to it. It is important to note that: It is not possible to make like-for-like comparisons by focusing on time alone. There are some categories that will only be reflected in the calculations in monetary terms (such as the cost of out-sourcing or overheads); and We need to be cautious about drawing any conclusions about relative efficiency from looking at time alone. It is possible that a process that takes more time to complete is more efficient as the staff employed to do it may be less expensive. Throughout this chapter we present information on the amount of time taken to go through a single end-to-end advice process. It should be noted that this chapter therefore focuses on the time taken for an advice process that leads to a successful sale of the relevant product. As such, the time taken in lead generation and in conducting early parts of the advice process that do not lead to sales is not captured in this chapter. The impact of time spent on unsuccessful sales is considered in Chapter Time by activity and adviser type In this section we set out the amount of time taken for the different activities in the advice process and show how they vary by adviser type. Throughout this section we present the results for a new savings and investments customer, as interviewees typically found it easier to think through the details of this type of customer before considering any differences which arise from either existing customers or different products. We set out the results for different customers in section 3.2 and for different products in section Overall time by adviser type We start by considering the total time for the overall process before providing additional detail on various components, paying particular attention to where there are substantial differences between adviser types. 24

25 Time to provide financial advice (minutes) COST OF PROVIDING FINANCIAL ADVICE Figure 5 Time to provide financial advice for savings and investments by adviser type Small standalone IFA Source: CRA calculations. Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Travel Figure 5 above sets out the total amount of time taken for providing a full end to end advice process by different channels. It includes time by all different types of staff (including financial advisers, paraplanners/branch staff and administrative staff) and has been split across the major components which comprise the advice process including the travel time which is needed to meet clients outside the adviser s office. On average across all channels, the advice process for savings and investments takes 7 hours and 40 minutes. 8 It is clear that there is considerable variation by channel, ranging from 4 hours 20 minutes in the banking channel to around 14 hours for national IFAs. 9 There is only half an hour s difference in the amount of time taken by small IFAs and network IFAs at around 8 hours 50 minutes and 8 hours 20 minutes respectively. The results for small and network IFAs are similar to those found by previous research conducted for the ABI in 2002 which estimated that IFAs took around 8 hours 20 minutes to complete the process. 10 This is also broadly in line with research conducted for the FSA which found that advising on lump sum unit trusts took just under 8 hours. 11 The direct sales channel takes 6 hours 30 minutes overall which is slightly shorter than the 7 hours estimated for the ABI in 2002 the reduction in time is consistent with The average figure is based on a weighted average using the proportion distributed through each channel as set out in Table 3. Throughout section 3.1 the weighting is based on the distribution split for lump sum saving and investment products. The longer length of time taken by national IFAs was consistent among all of the national IFAs interviewed. As noted overleaf this reflects their use of non-adviser staff (which may not have been captured through previous studies). Strategies for tackling the savings gap The role of the saver agent, An Oliver, Wyman & Company report commissioned by the ABI, August Costing Intermediary Services, Financial Assessment of Investment Intermediaries, Report for the FSA by Deloitte and Touche LLP, November

26 Time to provide financial advice (minutes) ABI RESEARCH PAPER NO 22, 2010 interview evidence. For the banking channel the time of 4 hours 20 minutes is around 1 hour 20 minutes faster than that found by the ABI s previous research. This is consistent with evidence from the interviews with firms operating through the banking channel who have stated that the increased use of technology over the last 5-10 years has significantly shortened the time required for the advice process to be completed. It should be noted that the data for the banking channel represents their tied adviser channel (rather than the IFA channel which some banks also have). Hence advisers do not need to consider providers across the whole of the market. The different service that is offered by tied advisers compared with the IFAs is one of the reasons for the substantial variation in the time taken for preparation of recommendations (considered in section 3.1.4). It is also important to recall that the time taken for the full advice process reflects the time necessary to serve their typical customers. Hence if new customers approaching IFAs (especially national IFAs) have more complicated needs than others then we would expect these customers to take longer to serve than other customers. Figure 6 below splits the time (excluding travel time) between that spent by the financial adviser compared to other staff such as paraplanners and administrative staff. Figure 6 Time to provide financial advice for savings and investments by adviser type and staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Small standalone IFA Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Source: CRA calculations. Figure 6 provides additional detail on the overall advice process which helps to interpret the results and the variation between different types of advisers. It is clear from this that there are very substantial differences in the extent to which non-adviser staff are used. The main areas where other staff are used (across all IFAs) are in the preparation of recommendations and the post-decision administration. This makes intuitive sense since 26

27 COST OF PROVIDING FINANCIAL ADVICE neither of these represent client-facing activities. For banks and direct sales forces, there is limited use of other staff because of the extent to which technology is used instead. National IFAs represent the channel in which paraplanners and other staff are most widely used among the five channels. Indeed, of the 740 minutes taken to complete the advice process (excluding travel), less than half of this time is taken by the adviser with other staff taking 470 minutes. It is particularly striking that the great majority of the time spent on the preparation of recommendations by national IFAs is undertaken by other staff (primarily paraplanners) which represents a significant difference compared to other channels. Even though national IFAs take longer than other channels, this does not necessarily mean that they face the greatest cost of providing advice since the cost of time for paraplanners and support staff is significantly lower than that of advisers. Hence these firms may be able to make efficiency savings through the use of different types of staff conducting different activities. The impact of this is taken into account in Chapter 4. That small IFAs and network IFAs use other staff to a lesser degree reflects the fact that small IFAs are less likely to have paraplanners than other channels, and that network IFAs effectively rely on the network to provide some of the services for them. This significantly reduces the amount of work that needs to be undertaken by other staff but again the impact of the costs of this will be picked up in Chapter Pre-initial meeting Before the initial meeting takes place, the adviser takes some time to arrange the meeting and prepare for it. Across the five channels the average time taken in this stage is around 20 minutes Initial meeting One of the surprising results of the research was to find that the time taken for the initial meeting was very similar across all channels, with 80 minutes the average time. This is surprising since the majority of interviewees indicated that IFAs would be expected to have clients who had more complicated financial arrangements than customers using the banks or direct sales forces. In turn this would have suggested that IFAs would require longer to gather information than other advisers. In practice, a number of IFAs will send clients a confidential questionnaire which clients will be asked to complete in advance. The questionnaire would typically cover some of the elements of the fact find and IFAs who use this approach report that their clients provide good responses to the questionnaire. This practice saves some time for IFAs during the course of the initial meeting compared to when IFAs do not follow this approach. Some IFAs who had frequent referrals from accountants also noted that the accountant may provide the IFA with financial details on the client in advance of the meeting. Many IFAs avoid using a laptop in the initial meeting, as they believe this causes a barrier between the adviser and the client by stopping the natural flow of conversation between 27

28 Average time for initial meeting (minutes) ABI RESEARCH PAPER NO 22, 2010 them and because they think clients may be concerned about information being captured electronically. Hence after the initial meeting, they will type the hard copy information collected in the fact find into their client relationship management system or would have administrative staff who do this (impacting the time taken for the preparation of recommendations). By contrast, advisers in the banking channel and also in the direct sales channel will more commonly use technology to capture information during the fact find process. They did not think clients were put off by this believing that most clients are now familiar with technology and would expect it to be involved in the advice process. One of the potential explanations of the similar length of time being required across all channels is that the aim of the initial meeting goes beyond trying to collect information from the client. Instead, advisers of all types considered it just as important to ensure that they build up a relationship of trust with the client which itself takes time to do. Some advisers stated that even if it would be possible to conduct the fact find in a shorter period of time they would be unlikely to seek to do this because they consider that at least an hour is required for a new client to begin to be comfortable with the advice process. Figure 7 below sets out a further breakdown of the time taken for the initial meeting. Since there was little difference between different types of advisers in this stage of the process, or indeed in the breakdown of this stage, we present the results for the average across all five channels. Figure 7 Average time for initial meeting across all channels (minutes) Disclosure of service and charges Fact find personal details Fact find financial details Fact find planning and objectives Source: CRA calculations. As is clear from Figure 7 above, disclosure regarding the charges and services is fairly brief. After the disclosure, the remainder of the initial meeting is taken up with the fact 28

29 Time to provide financial advice (minutes) COST OF PROVIDING FINANCIAL ADVICE find. Advisers indicated that gathering information on financial details and discussing the plans and objectives of the clients would take the bulk of the time Preparation of recommendations The single largest component of the advice process is the preparation of recommendations (with the exception of the banking channel). It is also the component which has the greatest variation between different channels. It is important to note that we would expect to find differences in this stage because tied advisers and IFAs are offering a different service with respect to searching the market. Figure 8 shows the breakdown of the different elements involved. It is again important to recall that the estimates of time are based on the typical clients for different advisory channels hence where clients have more complex needs or complex existing financial arrangements; this would be expected to feed through to the time taken in different channels. Figure 8 Time on preparation of recommendations Small standalone IFA Network IFA National IFA Banks Direct sales Average Confirmation of services to be provided Review of products and providers Gathering documents Development of suitability report Source: CRA calculations. There are substantial differences between advisers in banks and direct sales channels compared with IFAs. The average time spent by small and network IFAs is about 4 hours, while national IFAs spend around 6 hours 30 minutes on this. These are both in contrast to the 1 hour 10 minutes and 2 hours spent by banks and direct sales channel respectively. Differences are seen in all of the activities in this stage. Gathering documents IFAs spend more time on gathering documents than banks and direct sales forces for two main reasons: First, the documents that banks and direct sales forces provide to clients are physically accessible to them (either in the branch/office or they will have a pack of 29

30 ABI RESEARCH PAPER NO 22, 2010 documents if they visit clients in their homes). In contrast to this, IFAs must gather a range of documents from a variety of providers and would not have all of these immediately to hand. While it is straightforward to obtain them as they are now available online this nonetheless takes some time; and Second, most IFAs would expect to be entering into a relationship with their clients in which they would want to give holistic and ongoing advice across the whole range of products that the client has. Hence they would need to know additional details about the client s portfolio and, since interviewees agreed that IFA clients would generally have more complex arrangements anyway, they are likely to need to gather details from more providers. By contrast, the tied channel would be much less likely to gather details on products that the clients hold elsewhere and would instead rely on the customer revealing sufficient information to be able to give suitable advice. 12 Review of products and providers The primary reason that banks can prepare recommendations faster than other channels seems to be the use of technology driven processes which are common in all of the banks interviewed for this research. Many of these systems enable bank based advisers to automate the product selection based on information from the fact find, substantially reducing the amount of time necessary for this step. Direct sales forces spend a similar amount of time to banks on this as they too have invested in technology and because of the nature of tied advice. In some cases not only will this reduce the search in terms of eliminating the search across providers, but this may also reduce the search across products since they will only be able to recommend the products that are in their range. Unlike tied advisers, IFAs need to conduct a search of the whole of the market. The impact of this varies between the different types of IFAs. The most widely used service from networks which was mentioned by network IFAs was the research service in which the network conducts a search across the whole of the market for different products and then provides a panel of the best product providers for the product. As the network has done the due diligence of searching the whole of the market, advisers can usually select providers from the panel. Hence network IFAs do not spend as much time searching the market as national IFAs and require less support from non-adviser staff compared with either small or national IFAs. However, although this leads to a time saving of staff, they have to pay for the services provided by networks. The cost of this is captured in Chapter 4 through the additional overhead costs which network IFAs must pay to the network. The time taken for national IFAs to review products and providers is longer than other IFAs as unlike network IFAs this activity is undertaken in-house, albeit centrally, rather than outsourcing it. Compared to banks and tied sales forces, IFAs are less likely to have 12 This is also because they would be unable to advise on the specifics of a product which is from a different provider. 30

31 COST OF PROVIDING FINANCIAL ADVICE used electronic data capture in the initial meeting and therefore the fact find needs to be scanned or typed into information systems. This is particularly important in national IFAs because much of the activity in this step (and also regarding the suitability report) is often delegated to paraplanners under the direction of the adviser. Suitability report Again the time taken for developing the suitability report is much shorter for banks (40 minutes) than any of the other channels ( minutes). Many banks use templates for suitability reports with much of it pre-configured and advisers only needing to personalise a minority of the report. Banks will often employ technology at this stage (as well as in the previous step of identifying the relevant product) enabling processes to be conducted faster than otherwise. Although technology is used more extensively in the banks, it is important to note that the technology does not currently allow a seamless process with information from the fact find automatically feeding into the product selection and then into the suitability report and sale. In part this is to enable the advisers to personalise the recommendations and conduct additional checks on the results to ensure the advice is consistent with internal policies or compliance requirements. In part it also reflects the fact that not all systems interface perfectly with each other. Some banks estimate that the time taken for the review of products and the development of the suitability report has halved over time. It is also clear from interviews that the use of technology is expected to be expanded further such that increasing components of the advice process can be automated in the future. This would be expected to reduce the amount of time needed for the advice process although investment in technology would also bring associated costs. As with the review of products and providers, most national IFA firms delegate much of the work on producing the suitability report to paraplanners. The delegation and checking of the suitability report is one of the reasons that this element of the advice process takes longer than in the other IFA channels Presentation of recommendations The first element of the presentation of recommendations which involves reconfirming the client s financial status and their objectives was found to take around 10 minutes in all of the channels except the direct sales force which took slightly longer (as it was seen as a chance to reconfirm the need for the product, while other channels would do this as they talked through the suitability report). The bulk of the time in this stage would be spent on talking the client through the suitability report and the product related disclosure. As seen in Figure 9, there are only modest differences between channels of approximately 20 minutes making this one of the components of the advice process with the least variation (in absolute terms) between channels. 31

32 Time to present recommendations (minutes) ABI RESEARCH PAPER NO 22, 2010 Figure 9 Time to present recommendations Small standalone IFA Network IFA National IFA Banks Direct sales Source: CRA calculations. The interview evidence supported the result that small IFAs and network IFAs spent longer talking the client through the recommendations than other channels Post decision administration The final step in the process is the time spent after the client has decided to follow the advice put forward by the adviser (which in this research is assumed to lead to a specific product recommendation and therefore the purchase of this particular product). Although there were considered to be a number of distinct activities within the post decision administration section, interviewees were not able to clearly distinguish between them hence we do not provide a further breakdown of activities in this section The exception to this was issues to do with the payment for advice. Small and network IFAs spent only 5 minutes on this as small IFAs commonly rely on receiving commission later rather than dealing with invoicing for fees at the end of the advice process and network head offices gather commissions on behalf of the individual adviser. Nationals spent 25 minutes conducting a similar process to that of the network head office. Since nationals conduct this in-house it is included in the time estimates whereas the tasks done by network head offices are captured in the cost of advice in chapter 4. 32

33 Time to provide financial advice (minutes) COST OF PROVIDING FINANCIAL ADVICE Figure 10 Time for post decision administration Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Financial adviser Other staff Small standalone IFA Network IFA National IFA Banks Direct sales Source: CRA calculations. Figure 10 makes clear that national IFAs are a significant outlier regarding post decision administration. The time that they spend on this is by far the longest of all the channels with 210 minutes in total (of which 45 is by the adviser and 165 by other staff). This compares to an average of 70 minutes in the other IFA channels and as little as 40 minutes in banking. It is particularly striking that it is in the use of non-adviser staff where this difference arises. National IFAs have significantly greater emphasis on compliance checking and appear to have the strictest administration system compared with other channels, conducting a higher ratio of file checking than other firms. The back office system of some national IFA firms requires advisers to provide detailed information on all of the aspects of the advice and complete tasks on a compliance check list. Individual advisers tend only to get (financial) credit for the advice once all of these checks have been completed. This process is likely to mean that national IFAs will have a level of consistency in the advice that they give. It is also expected that it would be easier for them to provide information on advice should this be required either by the FSA or by the Financial Ombudsman Service (FOS) in the case of a complaint. Discussions with national IFAs (both head offices and individual advisers) confirmed the emphasis that was placed on post decision administration. A number of interviewees stressed that nationals (and networks) were more likely than small IFAs to face compliance checks by the FSA and therefore they were obliged to ensure that they had systems in place to demonstrate the quality of their advice. For network IFAs, the network itself conducts checks on documents reducing the amount of time that the adviser spends on this activity (with the costs captured in Chapter 4). Smaller IFAs spend less time on these activities than nationals. Small IFAs have less need for technological processes to be in place than nationals because they do not have a head 33

34 Time to spent on travel (minutes) ABI RESEARCH PAPER NO 22, 2010 office seeking to exercise oversight and the IFAs themselves can access paper files if this is required. Once again, banks and direct sales forces spend less time on this activity reflecting the use of technology which performs some of the post decision administration automatically (such as checking that sales are suitable based on the response to the fact find) Travel We have chosen to split out travel from the other components of the advice process partly because it varies between different business models and partly because it is not always clear whether previous research into the cost of advice has captured travel time. Travel is only ever conducted by the advisers themselves as opposed to the paraplanners or administrative staff as it arises in the context of the initial or subsequent face to face meeting between the adviser and the client. As seen in Figure 11, separating out travel also shows some interesting variation between the different channels which does not reflect the pattern that has been seen in many other sections. Figure 11 Travel time Small standalone IFA Network IFA National IFA Banks Direct sales Source: CRA calculations. Bank advisers usually meet their clients in the branch office and seldom travel to meet clients. Few banks included any travel time at all and for those that did it mainly reflected advisers who covered more than one branch and may be required to travel between them on a particular day. In general this was limited - as such advisers would aim to have full days in different branches in order to avoid the need to travel during the working day. In contrast to banks, direct sales forces maintain a process where they tend to visit clients in their homes rather than have the clients visit them leading to an average travel time of about one hour. 34

35 Time to provide financial advice (minutes) COST OF PROVIDING FINANCIAL ADVICE The amount of time spent travelling by network advisers is somewhat less than that spent by small IFAs and national IFAs. Advisers in this channel commonly asked the client to come to their office and were unwilling to travel as far to clients as other IFAs. Small IFAs generally expressed more willingness to travel to see their clients which appeared to reflect a greater desire to maintain customer satisfaction and deliver a service which high net worth individuals expect and a greater focus on an ongoing relationship business. National IFAs tend to have regional offices so their advisers may have to travel long distances to meet clients. Some firms indicated that the time spent on travel has been increasing slightly as they have reduced the number of offices, leading advisers to travel longer distances if they are travelling from their office. Unlike small IFAs, national IFAs may also be reluctant to turn clients down on the grounds of location leading to more travel time than firms which have a business focussed on their immediate locality Client facing activities One final element of comparison between channels is the amount of time which advisers spend with clients. Figure 12 below shows the amount of time that advisers spend on the initial meeting and the presentation of recommendations compared with other time in the process. Figure 12 Client-facing and non client-facing time by channel Small standalone IFA Network IFA National IFA Banks Direct sales Client facing Not client facing Source: CRA calculations. An interesting finding, as Figure 12 shows, is that the amount of time spent by advisers on client facing activities is roughly the same across all adviser types at an average of 130 minutes. Given the general differences between channels, this is a surprising result which may reflect advisers in all channels believing that they need to spend a reasonable amount of time talking with new clients in order to build up trust. 35

36 Time to provide financial advice (minutes) ABI RESEARCH PAPER NO 22, 2010 In all channels, more than half of the time in the process is on non-client facing activities (ranging from 52% in banks to 85% in national IFAs) and the variation in the time between channels arises from these activities. One of the challenges of this, particularly for IFAs where the overall process takes longer, is that clients may not be aware of the full complexity of the activities that are being undertaken on their behalf. If the advent of adviser charging places greater pressure on advisers to justify charges, IFAs will need to persuade clients of the need to pay for more than the time in which they see their adviser face to face. 3.2 Time by customer Turning to differences between types of customer, as we expect, the amount of time for providing financial advice is different for new customers compared to existing customers. The variation by customer types was found to be broadly similar across the three product types examined hence we focus our discussion here on the differences in the context of savings and investment products across different distribution channels. 14 It is important to note that the advice for an existing customer represents advice on a new investment rather than ongoing advice for an existing product. Figure 13 Time to provide financial advice across channels for new and existing customers New Existing New Existing New Existing New Existing New Existing New Existing customer customer customer customer customer customer customer customer customer customer customer customer Small standalone IFA Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Travel Source: CRA calculations. As shown in Figure 13, there are clear time savings across all channels when serving an existing customer compared to a new customer. Both small IFAs and national IFAs save 14 The exception to this was that time savings for new customers which were identified in the preparation of recommendations did not arise for protection products. This was because the purchase of a subsequent protection product by an existing customer involves purchasing a new protection product and therefore a similar process would need to be performed as with a new customer. 36

37 COST OF PROVIDING FINANCIAL ADVICE over 2 hours for existing customers compared with new customers. Network IFAs and direct sales forces both save over 1 hour, but banks save only 30 minutes when dealing with existing customers. Based on the evidence from interviews, banks mainly conduct transactional business rather than providing ongoing advice to clients. Given this, and the extensive use of technology through a highly system driven advice process, when serving an existing customer the adviser will typically go through the same process as for a new customer. Hence limited savings are observed for existing customers in this channel. Pre-initial meeting The one area where advisers spend more time for existing customers than new customers related to preparation in advance of the initial meeting. Typically, IFAs provide the latest valuation of existing customers portfolios at the initial meeting and so would need to spend some time on this in advance of that meeting. Initial meeting Time savings are made in the activities covered in the initial meeting because: Disclosure is very brief as clients already understand the service and payment options; The client s personal details are already recorded by advisers; Information on financial details can focus on any changes to their situation rather than being constructed from scratch; and Details on planning and objectives involve checking on any changes to their aims. In addition, advisers have already established a relationship of trust with an existing client so do not need to spend much time building trust. Savings for the IFA channels averaged 30 minutes in this stage with direct sales forces saving 40 minutes. Preparation of recommendations Developing recommendations is faster for existing clients of IFAs than new clients because these customers were likely to have less complicated needs in comparison to when they first took out advice as the IFA would already have got their financial affairs into some form of order. IFAs saved an average of 40 minutes in this stage. The bulk of the savings for banks arise at this stage (20 minutes) as topping up money in existing investments was thought to be the most common transaction by these clients. Direct sales forces saved time at this stage (30 minutes) both because of top up investments and also because of the reduced complexity of needs identified by IFAs. Presentation of recommendations Most IFAs and direct sales forces indicated that they would be likely to have only one meeting with existing clients whereas they would expect to have two meetings with new clients. Around 20 minutes was saved in this stage for all bar the banking channel with time also saved from the reduction in travel. For some IFAs they would effectively miss out the first meeting by receiving information from the client in advance so that they 37

38 ABI RESEARCH PAPER NO 22, 2010 came to the only meeting with some recommendations that they talked through with the client. Other IFAs would miss out the second meeting by posting the recommendations to clients with forms attached for signature. Unlike new customers who typically want the adviser to talk through recommendations in detail, many existing customers skip this step because they have experienced the process before. They are more likely to be able to understand the recommendation and less likely to raise questions or ask the adviser to justify the recommendations because they already trust them. Post decision administration National IFAs were the only firms identifying time savings for post decision administration and saved around 50 minutes for existing customers. These firms spent considerably more time on post decision administration than other firms for new customers because of capturing information on adviser systems. Once this has been done for new customers the information is already there enabling substantial time savings for existing customers. 3.3 Cost in terms of time by products As shown in Figure 14, in all channels the time taken to conduct advice is shortest for protection products and longest for pensions. This general result was supported by nearly all interviewees. This section focuses on the variations by products and is set in the context of new customers rather than existing customers since the qualitative differences in advice time between new and existing customers are broadly the same across products. However, different channels are more commonly used for certain products compared to others. Caution should be particularly applied to the calculations for pensions in the non-ifa channels since both interview evidence and evidence in section 1.1 indicates that they sell relatively few pensions Some customers seeking advice on pensions through tied channels might be transferred to in-house IFAs who would use different processes for the advice. 38

39 Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Time to provide financial advice (minutes) Pension Protection COST OF PROVIDING FINANCIAL ADVICE Figure 14 Time to provide financial advice across channels by product type Small standalone IFA Network IFA National IFA Banks Direct sales Average Pre-initial meeting Initial meeting Preparation of recommendations Presentation of recommendations Post decision administration Source: CRA calculations. Very limited differences arose in either the pre-initial meeting or the initial meeting reflecting the fact that advisers will not always know which product will be appropriate for the client at this stage. We focus below on the areas where there are differences for pensions or protection products compared to saving and investment customers. Pensions For the great majority of activities, advisers indicated that the time taken to advise on pensions was the same as for saving and investment products as advisers indicated that they would consider many of these products to be substitutes for each other. Pensions did take slightly longer to advise in the IFA channels, ranging from 10 minutes longer for small IFAs to 60 minutes for network IFAs. Pensions take around 20 minutes longer for banks and 30 minutes longer for direct sales forces. The increase in time for all channels arose due to the activities regarding the preparation of recommendations. When examining the weighted average time to provide advice across channels, pensions take around 2 hours longer than savings and investments. This mainly reflects the fact that pensions are primarily distributed by IFAs. Hence the weighted average picks up not only the increase in time in each individual channel but also the increase in the proportion of pension sales conducted by IFAs (where the advice process takes longer). It was also noted by interviewees that the length of time needed for pensions varied considerably depending on the complexity of the client s existing pension arrangements. For complicated clients, the adviser may need to spend a large amount of time on collating documents and understanding existing products. The process becomes even more time-consuming if transfers are required where advisers estimated that a further 2-4 hours might be required in the preparation of recommendations depending on the 39

40 ABI RESEARCH PAPER NO 22, 2010 number of existing pensions that the client held (this 2-4 hours is not included in the estimates above). Protection Providing advice on protection products is considered less complex compared with other products. Interviewees suggested that it is relatively easy to identify the client s needs and explain this to them. Information on protection products is readily available with the selection primarily based on price and search engines available online for comparisons. As a result, the amount of time spent on the presentation of recommendations on protection products is considerably shorter than that for savings and investments. Small IFAs and network IFAs save around 1 hour overall with national IFAs saving 3 hours and 20 minutes. Direct sales forces save around 30 minutes compared to saving and investment products while banks see no difference overall. On average the time for protection products was around 50 minutes less than that for saving and investments. It was noted for protection products that if clients need a medical report (more common for older people), the time needed for post decision administration can be substantial. The adviser, or administrative staff in many cases, may need to communicate with the doctor to get the report and finish additional administration work to fulfil the requirements of product providers. In addition, advisers may need to obtain detailed quotes from a larger number of suppliers in case clients fail acceptance criteria at some firms increasing the advice time by up to one hour in some cases. Advisers have noted that some providers conduct medical underwriting over the telephone directly with the client which removes the need for advisers to spend time on these activities. 3.4 Regulatory requirements and good practice One of the additional aims of this research was to identify whether there were particular parts of the advice process which were especially affected by regulation. After collecting information on the time spent on each activity, we discussed the degree to which this was driven by regulation and whether the time could be reduced if regulation allowed it. Surprisingly, we found that the vast majority of advisers did not believe that the time would be reduced in the absence of regulation and few advisers stated that they would change their behaviour if regulations were removed. The reasons for this include the following: Most advisers thought that regulation highlighted best practice approaches that should be part of the process anyway this may reflect the fact that one-off costs of meeting regulatory requirements have already been made hence there would be little commercial advantage from behavioural change; Some advisers take comfort that meeting previous (i.e. existing) regulations would imply that they were providing a reasonable service even if regulation was subsequently removed; and Some advisers think they would need to retain high standards to protect themselves from possible complaints. 40

41 COST OF PROVIDING FINANCIAL ADVICE Although all interviewees agree that over time higher regulatory requirements become the standard for good practice, the one area that the majority of advisers mentioned in respect of regulatory costs was regarding administrative compliance and record keeping. We clearly identified that firms are taking different approaches to compliance. Some firms, especially large firms, have teams specialising in checking documents solely for the purpose of compliance. While some of these people are considered necessary to ensure that advice is correct, some steps in the process are thought by interviewees to be beyond what is required to meet client needs. Many advisers indicated that records and documents were maintained purely in order to be able to demonstrate to the FSA or FOS that they had acted in a particular way rather than because they thought the documents were necessary for the client. However, if regulation was removed many of them would continue to follow these processes because they detected a general movement away from caveat emptor or buyer beware in financial services and therefore wanted to cover their backs through maintaining records. Some advisers working with national IFA firms also expressed concern that their head offices had instigated processes which involved considerable effort regarding administration at the end of the advice process. They considered that some firms were taking an unduly burdensome approach which might go beyond the strict regulatory requirements but that firms needed to do this in order to follow a risk averse strategy in respect of regulatory investigations. This may help to explain the relatively high cost of time which was identified on this part of the process for national IFA firms. 41

42 ABI RESEARCH PAPER NO 22, COST OF ADVICE Chapter 3 examined the time taken to provide financial advice. In this chapter we focus on the monetary cost of advice and the implications of this for the types of customers for whom advice can be profitably provided. The chapter is structured as follows: Section 4.1 converts the time taken for the advice process into a monetary figure; Section 4.2 derives the minimum case size for which advice can be provided profitably across different products; and Section 4.3 estimates the potential market size of profitable customers. 4.1 Monetary cost of advice The data presented in Chapter 3 represented the time taken to undertake the full advice process. In order to convert this into monetary terms, we need to take into account both: The cost of time; and The cost of overheads. Combined, this information enables us to calculate the monetary cost of advice. We calculate this both for an individual successful advice process as well as calculating the cost of advice taking into account the fact that some time is spent advising customers who do not end up buying a product Cost of time We calculate the cost of time using data on salaries collected from our survey which are presented in Table 5. We did not find significant differences between the types of IFAs, hence we use the same salary estimates across all three of the IFA channels. There were substantial differences in the salaries by different types of staff, with financial advisers having higher salaries than paraplanners, who in turn had higher salaries than administrative staff. We found similar salaries paid by banks and those paid by direct sales channels. It is clear from Table 5 that the salaries in banks and direct sales forces are somewhat lower than those for IFAs. Banks and direct sales forces did not appear to have any systematic variation in salaries between branch staff/paraplanners and other staff involved in the advice process. There were no strong differences in the salaries of administrative staff between IFAs and the banks and direct sales forces - hence we use the same salary for administrative staff across all channels. 42

43 COST OF PROVIDING FINANCIAL ADVICE Table 5 Annual salary by staff type ( ) Financial adviser Paraplanner/ Branch staff Administrative staff IFAs 57,000 32,000 22,500 Bank/Direct sales 35,000 22,500 22,500 Source: CRA calculations Overheads The costs of providing financial advice involve not just the salary costs of the staff who are directly involved in the process but also overhead costs such as rent, IT and general bills. Given that the main focus of the research was on the time taken for the advice process, it was agreed with the ABI that we would not seek to understand the breakdown of all of the different components of overheads in detail. Instead, the survey focused on collecting data on the overall breakdown of costs into salaries and overhead costs. This enabled us to calculate a scaling factor to apply to the cost of adviser time in order to capture the full costs. The scaling factor is set out in Table 6 below and is interpreted as follows: If the scaling factor is one, this means that the only costs involved in the advice process are salary costs; and, If the scaling factor is two, to take into account overheads, the cost of time based on salaries needs to be multiplied by two. It is clear from Table 6 below that most of the channels have scaling factors close to two indicating that salaries represent around half of the overall costs. Table 6 Scaling factor by channel Channel Scaling factor Small IFAs 1.8 Network IFAs 2.2 National IFAs 2.1 Banks 2.2 Direct Sales Force 2.0 Source: CRA calculations. The similarity of salary to overhead costs across channels is slightly surprising but reflects a number of issues that work in opposite directions within particular channels. For example: Firms which invest in technology and systems would be expected to have higher overheads than those that do not. However, those firms such as banks, direct sales forces and nationals tend to be larger firms which gain from economies of scale 43

44 Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Investment and savings Pension Protection Cost of providing financial advice ( ) ABI RESEARCH PAPER NO 22, 2010 allowing them to spread these overheads over greater sales volumes and more advisers; IFAs using networks may have relatively low overheads in terms of, for example, office space but have to pay for network services which increases their overheads; and Small IFAs may have modest overheads but do not have many advisers across whom these overheads are shared Total monetary cost of advice With the data on salary and scaling factors, we are able to translate the costs of providing financial advice from time to monetary amounts. In addition to these costs we also add in an average profit margin to reflect a normal level of profitability (sufficient to pay for the cost of capital which is invested in advisory businesses). Based on evidence from larger firms in the survey, this has been set at 20% across all channels. One of the difficulties in using evidence from smaller firms is that there is a trade-off in these firms between profits and salaries for partners or ownermanagers since individuals who are involved in the management of small companies may choose to receive remuneration through either salaries or profit. Hence it was considered more appropriate to use information from larger firms where this is less of an issue. Costs by product Based on the time spent on the activities by different staff, their respective salaries and overheads as well as profit, we are now able to calculate the total monetary cost of providing financial advice split by adviser types. Figure 15 below shows the results of the cost of providing advice to new customers. Figure 15 Monetary cost of advice by product and channel new customer Small standalone IFA Network IFA National IFA Banks Direct sales Average Total staff costs Overheads Profit Source: CRA calculations. 44

45 COST OF PROVIDING FINANCIAL ADVICE The relative costs between products remains the same as that seen in section 3.3 where the advice process for pensions took longer than that for investment and savings products which in turn took longer than that for protection products. On average it costs 370 to provide advice on a protection product, 420 on a saving and investment product and 600 on a pension. Based on a weighted average across all products, it typically costs around 510 to provide full financial advice for customers who go through the complete advice process. 16 The greater amount of time spent on the advice process by national IFAs has translated into higher monetary costs than other channels, although the difference between national and network IFAs in monetary terms has reduced relative to a comparison based on time. This reflects the fact that a larger proportion of the advice time by national IFAs is undertaken by support staff whose salary is lower than that of financial advisers. Network IFAs have lower time costs because some of their work is outsourced, but this is picked up through the higher overheads that they incur due to the cost of paying for the network services. Network IFAs, which had lower time costs compared with small IFAs, end up with higher monetary costs than small IFAs. This is partly because small IFAs have a higher proportion of advice time undertaken by non-adviser staff compared to network IFAs but also because network IFAs need to pay for network services (partly substituting for nonadviser staff time). Although advice in banks and direct sales channels took less time than other channels, the difference between the tied channels and IFAs is even greater when examined in monetary terms. This reflects the fact that salaries are significantly lower in these channels compared to salaries paid to IFAs. Costs by customer Using the same methodology we calculated the total monetary cost of advice for existing customers as well. Figure 16 shows the comparison between new and existing customers for savings and investment products. As with the comparison in section 3.2 in terms of time, existing customers are cheaper to serve than new customers. The reduction in costs ranges from 20 in the banking channel to 160 for national IFAs. 16 The weighting is based on the total intermediated premiums as set out in Table 3 using 10% of Single Premium (lump sum investments) and 100% of Regular Premiums (regular contributions) as is traditionally used when calculating new business figures in the industry. 45

46 Cost of providing financial advice ( ) ABI RESEARCH PAPER NO 22, 2010 Figure 16 Monetary cost of advice new and existing customers New Existing New Existing New Existing New Existing New Existing New Existing customer customer customer customer customer customer customer customer customer customer customer customer Small standalone IFA Network IFA National IFA Banks Direct sales Average Total staff costs Overheads Profit Source: CRA calculations. Costs accounting for unsuccessful sales The costs calculated so far are based on a successful sale covering the whole advisory process from pre-initial meeting to post-sale administration. As noted in chapter 3, it is also important to take into account the fact that advisers spend some time advising customers who do not end up going through the whole advice process. If these customers do not pay for the services, then these costs would need to be covered through the sales which are successful. During the course of our research we sought to gather information on the time spent on unsuccessful sales. However, the quality of responses was substantially weaker in these areas than the information provided on the advice process itself (which was where the research was focused). For this reason we rely on existing research on the amount of time spent on these other activities. Research for the FSA found that on average the time spent by advisers on marketing/prospecting for new clients and unpaid client servicing represented around 25% of total adviser time. 17 This is less than the time estimated in 2002 research for the ABI which found an equivalent figure of 35%. 18 We use the more recent evidence to calculate the cost of advice taking into account unsuccessful sales. The average cost of advice for successful sales was previously estimated as 510, taking into account the unsuccessful sales increases this figure to Costing Intermediary Services, Financial Assessment of Investment Intermediaries, Report for the FSA by Deloitte and Touche LLP, November Strategies for tackling the savings gap The role of the saver agent, An Oliver, Wyman & Company report commissioned by the ABI, August

47 COST OF PROVIDING FINANCIAL ADVICE Table 7 Cost of advice including costs of unsuccessful sales Product Successful sales only Cost including unsuccessful sales Saving and investments Pensions Protection Average Source: CRA calculations. Overall costs It is important to be careful in the interpretation of the results on the overall costs associated with the advice process. One could look at the figures above and assume that the differences between channels reflected a measure of efficiency. However, we need to be cautious about drawing this conclusion for a number of reasons: Advisers could be providing different services indeed it is recognised that IFAs are offering an additional service in comparison to tied channels through searching the market; Advisers could be offering different quality for example, there is evidence from interviews that national IFAs are placing considerably more emphasis on administration and compliance than other IFA firms; and Advisers could be serving different customers interviewees acknowledged that customers using IFA channels typically had more complex needs than those in tied channels. Indeed many banks would send wealthy customers to their in-house IFA rather than serve them through their tied channel. In addition, national IFAs could have more complex customers than customers using other channels and the additional complexity of individual customers would lead to more time and result in higher costs. During interviews, many IFAs highlighted that there would be considerable variation in the time taken for the advice process depending on the characteristics of individual customers and their existing investments. Part of this complexity may include having different amounts of money to invest. 4.2 Minimum case size by product Having identified the monetary cost associated with providing the full advice process, in this section we consider the implications of these calculations for the minimum case size that can be profitably served. To calculate the minimum case sizes, we use the monetary cost of advice (calculated in section 4.1) and data from the FSA to determine the revenues that commission based advisers receive compared to the size of the investment. 47

48 ABI RESEARCH PAPER NO 22, 2010 We focus here on the calculations for commission based advisers since fee based advisers would be assumed to be able to profitably serve any customer. 19 Information from the FSA sets out the average commission rates by products as shown in Table 8 below. Although these are the live figures available from the FSA s website, it should be noted that these rates have not been altered in the last two years. 20 Table 8 FSA Menu commission rates by product Product Single premium Regular premium Collective investments 4.0% 24.10% Investment bond 4.3% N/A Personal & Stakeholder pensions 5.6% 18.50% Protection N/A 110.7% Source: FSA website. Note The figure for protection is based on the figure for whole of life products although other forms of protection such as term assurance are thought to be broadly in line with this estimate. The FSA calculates the net present value of average commissions paid for each product taking into account both initial commission and trail commission. The figures that have been set out in Table 8 represents the average commission paid for each product (which is a combination of both initial commissions and trail commission) expressed as a single initial commission figure. The figures provided by the FSA are calculated after removing any commission which is rebated by the adviser to the consumer. New customers Based on the commission rates and the costs we have shown in Figure 15, we calculate the minimum case size that would be necessary for the commission generated to meet the costs of providing advice for customers who go through the whole advice process to a successful sale. 21 The results for new customers are set out in Table 9 for both regular contributions and lump sum investments. The figures for the average by product reflect the minimum case size needed to meet the average cost of advice across channels for any given product (i.e. they are based on the average cost of advice by product for successful sales as set out in Table 7). The overall average reflects the minimum case needed to meet the average cost of advice across all channels and all products This is not to suggest that customers would necessarily be willing to pay these fees. This followed the removal of the requirement for advisers to provide information on the market average commission rates to their clients. This involves dividing the monetary cost figure by the commission rates. 48

49 COST OF PROVIDING FINANCIAL ADVICE Table 9 Minimum case size by product and channel ( ) Small Network National Banks Direct sales Average IFA IFA IFA Annual regular contribution Collective investments 2,010 2,400 3, ,170 1,220 Pensions 2,700 3,490 4,360 1,160 1,630 3,150 Protection Average - Annual 2,310 Average - Monthly 193 Lump sum investment Collective investments 12,130 14,490 19,280 5,080 7,040 10,440 Investment bond 11,280 13,480 17,940 4,720 6,550 9,720 Pensions 8,920 11,540 14,400 3,840 5,370 10,670 Average 10,300 Source: CRA calculations. On average, annual contributions of 1,220 would be needed for advice to be profitably provided for regular contribution collective investment schemes. The figure is substantially higher at 3,150 for regular contribution pensions, but considerably lower at 340 for protection products. Across all product types, customers making regular contributions would need an average annual contribution of 2,310 ( 193 monthly), while customers making a lump sum investment would need to be able to invest 10, It is notable that the investment size for lump sum investments to pensions is lower than that for collective investments or investment bonds despite the fact that the time taken to advise on pensions was found to be slightly longer than that for other investments. This reflects the higher average commission payments that are received on pensions compared to collective investments or investment bonds according to the FSA figures. The resulting estimates for collective investments broadly concur with evidence from interviews regarding the size of investments that advisers would consider profitable. For example, IFAs indicated that advising on a lump sum 7,200 ISA contribution alone would not be considered to be profitable, whereas in the banking channel this would be seen as profitable. This is consistent with the finding that for collective investments the profitable case size is above the 2009/10 ISA limit for IFAs but below this level for banks. It should be noted that this is calculated on the basis that only one product is purchased. During interviews many IFAs indicated that they would expect a customer to have a much larger value of investments before they would be willing to take them on as an ongoing 22 The weighting is based on the total intermediated premiums as set out in Table 3. Within single premium savings and investments, collective investments represent 12,568 million while investment bonds represent 12,249 million. 49

50 ABI RESEARCH PAPER NO 22, 2010 client. For example, a number of national IFA firms indicated that they would expect customers to have at least 20-25,000 to invest for customers to be considered worth serving. Interview evidence from small and network IFAs found that they typically set at level of 15-20,000 as the minimum level they would consider likely to be profitable. That national IFAs expected a larger value of investments than other IFAs is consistent with the results set out in Table 9. Some advisers would be willing to take on new customers with small value investments even if customers would not be immediately profitable. This is partly explained by their expectation that these customers would become profitable in the future, which is consistent with the finding that the cost of the advice process is lower for existing customers than for new customers. In the direct sales force channel, investments above 10,000 were considered likely to be profitable. In the banking channel interviewees indicated that the average investment values which banks currently obtain were in the range 10-20,000. It should be noted that for many banks, customers with large values of investments will be passed over to their in-house IFA channel which has the effect of reducing the average investment value in their tied channel. Unsuccessful sales Once again, we repeat the calculations taking into account the fact that not all advice services will lead to a successful sale i.e. using the figures set out in the final column of Table 7 to estimate the figures set out in Table 10 below. Table 10 Minimum case size including unsuccessful sales ( ) Average Annual regular contribution Collective investments 1,630 Pensions 4,200 Protection 450 Average Annual 3,080 Average Monthly 257 Lump sum investment Collective investments 13,920 Investment bond 12,950 Pensions 14,230 Average 13,730 Source: CRA calculations. Taking into account unsuccessful sales increases the minimum level of premiums required for the sale to be profitable for advisers. Across all product types, customers making regular contributions would now need an average annual contribution of 3,080 ( 257 monthly), while customers investing a lump sum would need to be able to invest 13,

51 COST OF PROVIDING FINANCIAL ADVICE Overall case size Again it is important to interpret the results of these calculations carefully. In particular, it should be noted that the calculations of the minimum case size assume that a single product is being purchased. If multiple products are purchased at the same time, then we would expect some of the costs of the advice process (such as the fact find, entering client details on IFA systems etc) would be spread across multiple products. This would have the effect of enabling lower contributions for a particular product to be profitable as additional products would be purchased at the same time. 4.3 Potential market size by product Having identified the size of premiums for which advice can be profitably provided, we were also asked to assess the potential market size associated with these levels of premiums i.e. to consider the number of customers that might be able to make investments of the necessary level. We first consider this on the basis of successful sales only and then consider this including the costs associated with unsuccessful sales. Regular contribution products For regular contribution products we assess the potential market size on the basis of the number of customers whose incomes enable contributions at the level of the minimum case size. We have assumed that: For savings and investments we examine a scenario in which individuals save around 6% of their income in these products; 23 For pensions, we examine a scenario in which individuals save 4% of their income; 24 and For protection products we consider a scenario in which individuals are able to contribute 1.5% of their income to these products. 25 We first estimate the minimum annual income that would be required in order that the relevant proportion of income is equivalent to the minimum case size set out in Table 9 above. This is set out in Table 11 below. 23 This is based on the average amount saved as percentage of income from NS&I, Quarterly Savings Survey, Issue 21 Autumn 2009, p4. 24 This is based on average employee contributions made into stakeholder pensions for Association of Consulting Actuaries 2009 Pension Trends. Source: 25 According to Swiss Re, the average premium for all new term assurance business in 2007 was 397. HMRC statistics show that the average income of UK tax payers is around 27,000. This gives a contribution rate of around 1.5%. Source: Term & Health Watch 2008, Swiss Re; HMRC statistics table

52 ABI RESEARCH PAPER NO 22, 2010 Table 11 Annual income requirement regular contributions Small IFA Network IFA National IFA Banks Direct sales Average Collective investments 33,550 40,080 53,340 14,040 19,460 20,320 Pensions 67,490 87, ,000 29,020 40,660 78,760 Protection 25,110 30,700 35,950 12,350 15,630 22,410 Source: CRA calculations. It should be noted that this calculation does not imply that customers with these income levels would be willing to contribute the given proportion of their income. 26 Using information on the income distribution it is possible to identify the size of the population who have incomes above these levels. This is set out in Table 12 below. Each of the population estimates is calculated for the channel and product combination in order to estimate the number of individual customers who could be profitably served for any particular combination. Hence it would not be correct to add up the number of customers across channels or products since many of the same customers will be included in each product/channel combination. 27 Table 12 Population size regular contributions (millions) Small IFA Network IFA National IFA Banks Direct sales Average Collective investments Pensions Protection Source: CRA calculations based on information on income distributions by taxpayers from HMRC statistics table 3.3. It is clear from Table 12 that there is considerable variation in the size of the population who could be profitably served by both different channels and also by different products. The interpretation of these results must be done with some care. For example, the finding that a potentially large population could be served profitably through the banking channel must be interpreted in line with the evidence from Table 3, that relatively few pensions are distributed through this channel. The calculation of the average population size reflects the average cost of advice by product which itself reflects the current distribution of products across channels. Overall there is a potentially profitable market segment of around 2 million for regular premium pensions. The equivalent market segment is around 17 million for regular premium collective investments and 15 million for protection products. Again we repeat the calculations taking into account unsuccessful sales, with the results provided in Table 13 and Table 14 below Conversely, there might be some customers who would be willing to make contributions of a higher proportion of their income and therefore require lower annual incomes to achieve the minimum case size. For example, the 6.9 million customers who could be profitably served by small IFAs for collective investments include the 5.2 million customers who could be profitably served by network IFAs for collective investments. 52

53 COST OF PROVIDING FINANCIAL ADVICE Table 13 Annual income requirement (including unsuccessful sales) regular contributions ( ) Small IFA Network IFA National IFA Banks Direct sales Average Collective investments 44,740 53,440 71,120 18,720 25,950 27,090 Pensions 89, , ,340 38,700 54, ,020 Protection 33,480 40,930 47,930 16,470 20,840 29,890 Source: CRA calculations. Table 14 Population size (including unsuccessful sales) regular contributions (millions) Small IFA Network IFA National IFA Banks Direct sales Average Collective investments Pensions Protection Source: CRA calculations based on information on income distributions by taxpayers from HMRC statistics table 3.3. As can be seen from Table 14 above, including unsuccessful sales reduces the number of potential customers that can be profitably served. The market size drops from about 17 million to 12 million for collective investments, from 2 million to 1 million for pensions and from 15 million to 11 million for protection products. Lump sum investments For lump sum investment products we assess the potential market size on the basis of the population which has sufficient savings from which the lump sum could be made and this is set out in Table 15. As such, using a stock figure in this way represents a one-off calculation of the size of the population that currently has sufficient savings to make the necessary lump sum investment. 28 Table 15 Population size lump sum investments (millions) Small IFA Network National Banks Direct sales Average IFA IFA Collective investments Investment bond Pensions Source: CRA calculations based on information on savings from the Family Resources Survey Table The calculation may therefore not be reflective of the longer term size of the market in terms of the average number of customers who would be able to make this contribution in any given year. That is, if all of the customers in the profitable market make the necessary lump sum investment in the first year, we would not expect all of the same customers to be able to rebuild their stock of savings such that they could do this again in a subsequent year. 53

54 ABI RESEARCH PAPER NO 22, 2010 This calculation is based on information from the Family Resources Survey (FRS) regarding the proportion of the population which has savings above certain levels. 29 The FRS notes that there is some under reporting of savings by respondents to the survey. To the extent that this is the case, this will lead to an under-estimate of the number of individuals who could potentially be profitably served through the advice process. Set against this is the fact that the calculations are based on the total value of savings which individuals have and does not take into account whether customers would be prepared to invest all of their savings into a single product. On average there is a potentially profitable market segment of around 13 million customers for lump sum investments in collective investments or investment bonds. For lump sum investments in pensions there is a potentially profitable market of around 12.6 million customers. Again we provide additional information on the potential market size taking into account unsuccessful sales which is set out in Table 16 below. Table 16 Population size (including unsuccessful sales) lump sum investments (millions) Small IFA Network National Banks Direct Average IFA IFA sales Collective investments Investment bond Pensions Source: CRA calculations based on information on savings from the Family Resources Survey Table 5.9 and ABI Quarterly Savings and Protection Survey (Q3 2008). This results in a reduction of the number of potential customers that could be profitably served. The market segment reduces from about 13 million to less than 11 million for collective investments and investment bonds and from 12.6 million to 9.3 million for pensions. Overall we find that when taking into account the costs of unsuccessful sales, around 9-12 million customers could be profitably served for most products, although this figure falls to around 1 million for regular contribution pensions. 29 The FRS information does not allow us to assess the extent to which some of these savings may already be invested in equity based investments although it certainly excludes pensions. Savings are most commonly held in: current accounts; bank and building society accounts; ISAs (which are grouped with deposit based products but possibly include some equity ISAs); and Premium Bonds. 54

55 Aims and scope: The Association of British Insurers (ABI) is the trade body representing the UK s insurance industry. The ABI Research Paper series is used to publish the research that the ABI carries out on behalf of its members in order to help inform the insurance industry and contribute to public policy debate. Series Editor: Rebecca Driver, Director of Research and Chief Economist, ABI Author: This paper was written by Kyla Malcolm, Tim Wilsdon and Charles Xie from Charles River Associates. ABI Contacts: Copies of ABI Research Papers are available on the ABI website. Copies of ABI Research Papers may also be obtained from Research Department, Association of British Insurers, 51 Gresham Street, London, EC2V 7HQ; Tel: +44 (0) ; Fax: +44 (0) ; [email protected]. For Press queries, please contact the ABI s media team on Tel: +44 (0) ; [email protected]. Disclaimer: The analysis presented in this paper is based on research undertaken by the ABI and its contributors and does not necessarily reflect the views of the Association of British Insurers, or its member companies. The research was carried out on behalf of the ABI and its members and is not intended to be relied on by a wider audience. This paper is being published in order to help inform the insurance industry and to contribute to public policy debate and should be used only in that context. For that reason neither the author nor the ABI shall have any liability for any loss or damage arising in connection with the publication or use of this paper or the information in it. Neither the author nor the ABI are authorised for the conduct of investment business (as defined in the Financial Services and Markets Act 2000) and this paper is not intended as, and shall not constitute, investment advice. Copyright: Association of British Insurers, The information may only be used for private or internal use (provided that fair attribution of copyright and authorship is made). This paper shall not be used for commercial purposes (except for internal use, provided that the copyright and any other proprietary notices are not removed). Reproduction in whole or in part, or use for any commercial purpose (save as provided above) requires the prior written approval of the Association of British Insurers and such consent may be withheld or made subject to conditions. ISBN

56 For more information, contact: Association of British Insurers 51 Gresham Street London EC2V 7HQ