Is the paternalistic relationship between the UK financial services industry and its clients still in existence? While this undoubtedly created the hugely successful savings culture we enjoyed for many decades in the UK and provided many individuals with the means to enjoy their retirement, it’s now evident that paternalism is no longer trusted.
As an industry, the consumer needs to always be our starting point. The FSA started its industry consultation at Consultation Paper 1 (CP1) in 1997 by emphatically stating the importance of consumer involvement. The industry since then has gradually lost this traction and consequently its client focus. The industry can rebuild its credentials, and in many ways must do so, by starting again to address the needs of the consumer by putting them at the heart of the savings and product proposition.
Regulators in the UK are clearly committed to tackling the key issues. From Sandler, through Myners, Pickering, depolarisation, the Pensions Act, to Adair Turner and the Pension Commission, determined efforts have been made to bring the industry and the consumer into closer alignment. However, we can’t get there through regulation alone – the industry must seize the initiative.
Appropriate product
While the industry may need to differentiate its sales process to deliver appropriate product to different customers and channels – e.g. pension funds, multi-managers, retail distribution – ultimately the consumer of all products is the individual. Defined benefit (DB) or defined contribution (DC) are about an individual’s pension planning requirements. It’s no different with Investments or Life & Pensions products – whether sold online, through branches, IFAs or supermarkets – it is an individual who buys these products.
The disaggregated approach to products with different components and different suppliers of advice, wrapping, investment, service with multiple brands and messages is too complicated to beckon back the consumer.
Innovation is now required to deliver a holistic product that meets our customers’ needs, providing a vehicle, along with the associated risks, that they can understand, and a product that does what it says it does.
The investment decision – asset class and underlying manager - is the most important decision an individual consumer can make. The investment decision eclipses the value of most other forms of advice given to clients – getting it right is crucial to savings success or failure. Yet, despite the importance of this decision, investment remains a small part of the advice given to the consumer.
The gates of open architecture have well and truly been opened by the individual’s demand for choice, they cannot again be closed. The problem with choice is that people want choice but don’t want to choose. Choice can often lead to reckless conservatism or inertia and simply put, a good product is only a good product if appropriate to the individual’s need.
Hence greater clarity of proposition, more transparency and clear guidance are what the individual needs. Advice and choice need to be combined with an offering that serves the individual.
Few, if any, organisations can deliver all that is needed to create such products and therefore multiple organisations working together in strategic partnerships will be advantageous.
Year of the consumer?
In the last decade we have seen some important changes. The consumer is now better informed then ever before, products are more transparent and readily accessible.
Products are also becoming increasingly sophisticated – the gap between traditional product and alternative product has narrowed considerably. Cross border mergers are on the rise – bringing sweeping innovation with it. Survival will depend upon an organisation’s ability to offer a clearly differentiated proposition to its consumers.
Is 2006 the year of the consumer? We are approaching a demographic inflexion point as more people are getting older and pensions provision struggles to keep pace.
At the same time, the potential product offering and advice available to the individual may be at a new peak – the advent of Ucits III, growth of open architecture and outsourcing, the rise of the specialist manager, and increasing focus across the industry on core competencies.
There is an opportunity for 2006 to be the year of the consumer but, it’s down to the industry to take itself there.
David Curtis, head of sub-advisory, Goldman Sachs Asset Management.
Researched and published in association with Goldman Sachs Asset Management.
