It has been a protracted, desperate fight for survival but the implementation by the FSA of new rules arising from its Retail Distribution Review has surely delivered a mortal blow to many of the 21,700 individuals and companies offering financial advice to UK consumers. Already buckling under the weight of hugely demanding professional conduct and disclosure requirements, the new regulations this month that prohibit firms taking any form of commission from suppliers means that the only source of revenue for independent financial advisors is now upfront fees payable by their clients. The problem is that most research suggests that high street customers are unwilling to pay for financial services either at all or at least to the extent that advisors require to make ends meet.
Although a chronic history of mis-selling life assurance, pensions and other savings products precipitated this shake-up, the inherent potential for conflict of interest at the root of these scandals is not confined to the investment industry; commercial insurance brokers also represent the policyholder but depend on an income stream provided by the insurer. Unlikely perhaps, but were the FSA to similarly ban commission-based selling of insurance then brokers might have to face up to the same inconvenient truth as financial advisors; that the client does not value their service as much as an insurance company.
Already there are signs that distribution patterns are shifting. As online applications evolve and improve, small enterprises are buying insurance directly without intermediation. In the UK middle market many brokers have flipped over the fence entirely for part of their business; acting not for their client, but rather as agent for and underwriting partner of the insurer. Businesses like Thistle, Oxygen, Aquila, Pioneer and Globe are all owned by Lloyd’s brokers and are quietly developing market share operating in this capacity. The formation of the Managing General Agents Association (MGAA) a little over one year ago was in direct response to the very significant growth in the number of firms, many connected to brokers, operating a delegated underwriting model.
It is at the corporate end of the market, that brokers remain steadfastly customer-facing. Since the 2004 Spitzer inquiries, however, the international broking houses have been more transparent in how they are remunerated; working normally for a fee and where they receive commission often rebating it back to the client. Unfortunately in recent times, whilst the brokers have done a good job at containing expenses, with acquisition targets now drying up, their organic growth has remained pretty sluggish. In these recessionary times, with clients looking to minimise insurance-spend, brokers are under pressure to strengthen their value proposition and correctly charge for it. For Willis, like Aon before them, to look externally and specifically to McKinsey for their new CEO suggests that, unlike the investment industry, market pressure rather than regulation is prompting a transformation in the role and function of the intermediary in our sector.
2 thoughts on “On the Death of the Salesman”
Saving the best until last but how many as able/willing to get proactive?:
“…market pressure rather than regulation is prompting a transformation in the role and function of the intermediary in our sector”
An interesting conundrum that the intermediary sector faces and commission disclosure could be a game changer.
Undoubtedly more of the larger brokers will look to form their own MGA principally to allocate commission into different business areas so in essence they will be able to tell their client they only get paid 10% rather than 30%. This raises more questions, is a broker with a binder that places their own clients into their own facility a true MGA? Conflict of interest? The unenviable job of peusuading broking placement staff to place into a facility rather than place into the open market? TCF? But does this cost of setting up, recruiting underwriters, running BDX, ELTO management and all the joys that you have running an MGA justify this approach? As you and I know running an MGA isn’t cheap particularly with the increasing compliance cost and requirement of information from capacity providers.
However on the subject of the death of the salesman, I don’t think so, but an adaptation of selling beyond price (which everyone says they do) will be required, otherwise we could soon have a meerkat commercial combined policy and I am sure he hasn’t achieved chartered status yet?!
MD R&Q Commercial Risk Services.