Are we assuming too many things about protection advice?

By guest blogger John Lappin

Informed guessing has always been a bit of a tricky exercise for the advice market. For example, once upon a time, it was widely assumed that a huge number of IFAs would become multi-tied, following depolarisation. They didn’t or not many anyway.

If you were to read any of my columns from a few months ago, you would find me assuming that the tide had turned in favour of restricted advice though I wasn’t necessarily happy about it. I based that on the fact that in five conversations in a row with five very different types of IFAs, they said they were going to restrict, admittedly with varying degrees of enthusiasm.

Then a recent survey said that the vast majority of advisers planned to try and stick to independence contradicting my bold assumptions.

The lesson, as I should know by now, is ‘never assume’. That doesn’t mean we shouldn’t at least try and map out what may happen to the market. It is particularly interesting to try and do this for the protection advice market. Oddly this is partly because it is the bit of the market that is, in theory, untouched by the big regulatory changes – the RDR and the MMR.

But is there a danger that we also assume too many things about protection advice? There are at least two headline assumptions for protection advice and they are as follows – that many IFAs will try and sell more protection post 2012 if, for no other reason, than it will help with cash flow. And IFAs who don’t make the RDR grade will move into protection or more likely protection and mortgages.

Now, I don’t think I actually disagree with these assumptions but I can see some pretty fundamental challenges for both groups.

Dealing with IFAs selling more protection first, I must confess it makes me wince a little. Yes there are business challenges, but there also needs to be an advice need. In other words, the business has to be compliant and the advice appropriate. Certainly there are the usual re-broking hazards, though a lot of the heat is likely to be taken out of the issue because premiums are very likely to rise around the time of the RDR start date.

My concerns about what you might call ‘overselling’ are addressed up to a point by the strong possibility that protection has actually been undersold by wealth managers. It may even be possible that advice businesses will neglect protection as they move to their new adviser charging regimes. Their business brain power may be used up making sure their wrap is right and their client agreements compliant. Is it possible then that for this group the RDR effect is neutral? Some will advise on more protection, some less. If there is one thing I would say to this group, it is that the RDR in its ethos is meant to be about making the advice client centric. Advisers should be aiming to construct a system that encourages clients to protect their income and their health as well as build and protect their wealth. Only the very wealthy don’t need the insurance (and I bet many of them need business protection insurance anyway).

Is it possible that many smaller advisers take ‘shelter’ in mortgage and protection advice?

In other words, look after the client and the business should look after itself. It probably helps the cash flow too. However, thinking of protection providers and broker consultants, perhaps they need to be out there making this case i.e. optimise your advice, not optimise your commission.

Now let’s look at the second group, those that will offer mortgages and protection or maybe just protection. I have a few concerns here too. For example, an adviser who is currently an IFA may be geared up for mortgages and protection advice, but also does some 10 to 15 per cent on the other types of business. Will these advisers have considered exactly how to make up for the lost income?

Perhaps focusing their time on what they do best will also boost their income and their sales. But initially this looks like a fall in income to me. In addition, a significant amount of income may be taken on an indemnity basis. This concentration of income streams must clearly carry some risk to the ultimate viability of these businesses.

In addition, have these advisers constructed a referral deal with someone who does still advise on investment and pension business? Is the contract word of mouth or something more formal and does it include their legacy clients?

Is it possible that many smaller advisers take ‘shelter’ in mortgage and protection advice, while they try and get through their final exams? They can’t, in pure regulatory terms, hold on to these clients.  Do you think the wealth manager up the road only wants to borrow them for a while and will give them back?

Finally, just how much will the mortgage market changes stymie protection advice and therefore throw out all these other calculations? The key issue being, what share of the client’s precious time can be devoted to protection advice, given the length of time you will be expected to spend on the mortgage, because that also requires quite a bit of thought too.

But whatever the repercussions, medium term protection sales from this group may depend on how robust the new business models are.

Okay. Now I am a journalist not an adviser. Maybe I am worrying away at things that are simply not really big issues and if so, please let me know. But it strikes me that advisers need robust strategies and business plans that take protection into account whatever their future regulatory status. And maybe providers need to consider ways in which they can help them do that too.

The Money Debate

Over to you: Do you agree with John’s views? Do you think that after RDR advisers will give more protection advice? Please leave a comment below and let me know your thoughts.

Click for more guest blogs:

Jeff Prestridge: Why we need an annual ‘protection awareness day

Edmund Tirbutt: Is it time for GRiD to spread its wings into Individual Protection?

Tony Langham: Why has financial services gone so badly wrong?

The thoughts and opinions in the guest blogs belong to the authors and do not necessarily represent the views of Roger Edwards or Bright Grey/ Scottish Provident.