In this new depolarized world, banks and large financial institutions will have the competitive advantage eating up IFA market share, in some cases by as much as 18% over 5 years.
According to the report, post-polarisation, IFAs are likely to struggle to hold onto market share, particularly in products such as annual life and annual pensions term products. Datamonitor expects market share will transfer over to the direct routes, most notably the banks, over coming years. Over the next five years, IFAs will see their market share of total life and pensions distribution diminish by over 9% from 66.2% to 56.9%.
Ultimately, it is the banks that will benefit from depolarisation, as they leverage their considerable distribution networks and existing relationships with retail customers. IFAs will come under increasing pressure to distinguish themselves from advisors sitting in high street branches offering financial product advice.
Despite the fact that IFAs will lose market share in Life products, it will be in pensions that they feel the largest squeeze. This will primarily driven by the introduction of simpler 'Sandler' style pension products that do not require the level of face-to-face advice that is currently offered by IFAs. These products and depolarization will result in a rise in market share for the direct salesforces, most notably those of banks of 16% in the period 2002-2007, compared to a decline in market share of 18.6% for the IFA channel over the same period. This represents a drop in market share from 78.6% to 60.0% in annual pensions distribution.
The number of IFAs joining networks has increased considerably over the last 5 years, from 4,589 in 1998 to 6,246 in 2002, an average growth rate of more than 7%. There are various reasons for this increase in network firms: network brands tend to be very strong and this can be of an advantage to any IFA joining that network, regulatory compliance falls on the network rather than on the individual IFA, the cost of professional indemnity (PI) insurance is increasing in the face of recent legal action and becoming prohibitively expensive for smaller IFAs, IFAs that are networked have access to larger client databases and better technology than they would if they were separate.
Commenting on the results of the report, Datamonitor financial services analyst and author of the report, Alan Shields, said: "The new regulations that are due to be introduced by the FSA will see the competitive landscape of distribution in retail life, pensions and investments products change markedly, with banks set to enter the fray as competitors. Unlike previous proposals however, the new regulations have been hailed by the industry as a smart move, they allow IFAs to assess and define their own business models rather than dictating rules to them.
"In the new depolarized market, banks will have the competitive advantage, able to leverage their considerable distribution networks and make it harder for IFAs to distinguish themselves as expert advisors. It will be in the hands of IFAs to decide how they can best compete in this new environment, whether they stay independent and focus on relationships, form strategic partnerships, focus on wealthier clients or just consolidate to survive.”
