Key Developments in the Retail Investment Distribution Landscape

Kevin HintonHead of Investment Distribution

June 2014

• Agenda

1. Brief industry update- Relentless global regulatory developments and its impact on

the advice arena- What we have learnt thus far from the UK’s Retail

Distribution Review (RDR)- And Australia?- Early signs in South Africa….

2. The different “independent” financial models emerging

Competing in a new worldRegulations add complexity and costs

The Retail Distribution Review in the United Kingdom

In the context of Retail Distribution Review (RDR) its mainly to do with the removal of conflicted remuneration structures and issues around the status of the adviser:

• Ban on all commissions (upfront and trail) on retail investment and pension plans

• Replaced with adviser charging – fair and transparent charges for the advice

• Move away from volume driven incentives

• Regulation on % fees on assets under management

• Looking at “opt in” system for on-going trail fees – must be on going service

• Commission on pure risk products remains

• Regulation of Platforms – who benefits from rebates, status of adviser- Independent, best advice, whole of market concepts and Restricted Advisers

• Review of Professional Standards – upwards and no grandfathering

1. In the UK, the number of financial advisers has dropped dramatically, with qualified reports suggesting numbers have declined by 20% with professional standards, the high cost of professional indemnity cover and ‘economically unattractive” business models being cited.

2. Broker networks and dealer groups have increasing prominence, with recruiting of independents being aggressively pursued.

3. “Restricted” advise models seem to have prevailing precedence with the UK’s Investor’s Chronicle suggesting that 8 out of 10 of the largest financial adviser firms (Hargreaves Lansdowne, Close Brothers, Skipton Financial Services, Towry, St James etc.) choosing restricted advice models.

4. Furthermore, large financial adviser firms are extending their services to incorporate all elements of the value chain (advice/investment management/platform administration). This is commonly referred to as “vertical integration” across the industry.

What challenges are we facing?Financial Adviser trends - UK

Distribution trends: mergers and acquisitions

1. Post-RDR the IFA industry has shrunk by more than 20%

2. Purchases of IFA businesses have fallen into three categories:

- Life companies

- Venture capitalists/private equity firms

- Network providers

3. A successful merger/acquisition has to have a repeatable/robust process – most fail as they battle to demonstrate value

4. Most acquisitions acquire the client book and not the staff (risky?)

5. Valuations at 1.5 to 4X recurring income

Life companies

1. Aegon Distribution

- Bought Positive Solutions in 2002 (100 advisers - ₤163m)

- Then formed ORIGEN through the purchase of 5 additional IFA firms (losses of ₤1.7m)

- 2013 Positive Solutions sold to Intrinsic (Aegon take equity stake)

2. AXA Life

- In 2006, purchased Thinc Destiny for ₤100m (650 advisers and ₤3bn under advice)

- “It hasn’t worked”?

Venture capitalist and private equity firms

1. Succession- 24 month transition plan on acquisitions- Own white-labelled platform- Robust integration into process- Expected to achieve dependable recurring revenue to achieve

capital valuation of ₤700m2. Ballpenny

- Targeting 60 IFA acquisitions- Completed first 4 = AUM ₤325m- Backed by Countrywide (property services) and US-based

investment management firm Oaktree Capital Management3. Towry Law

- Shareholder Palomon Capital Partners (funding acquisition)- 10 acquisitions (144 advisers and AUM ₤4.6bn)

What makes a successful acquisition?

1. You must have a robust repeatable sales process

2. Advisers will go the extra mile to prove their independence – if you have too much bias towards your own solutions, advisers walk…

- Aegon bought an IFA business with 700 advisers and retracted to 40 very quickly

3. Advisers have a dislike of product providers – life companies have failed in this endeavour (private equity firms and national networks more successful)

4. Life companies paid too much

What challenges are we facing?Financial Adviser trends - Australia

NameNo. of

advisersOwnership

Professional Investment Services 1444 Centre Going Alliance (independently owned)

AMP Financial Planning 1360

Count Financial Ltd 864 Commonwealth Bank of Australia

Millennium 3 Financial Services 810 Australia and New Zealand Banking Group (AMP)

Commonwealth Financial Planning 613 Commonwealth Bank but multiple advice brands

1. In Australia, retail distribution channels are dominated by “dealer groups”.

2. These dealer groups constitute 85% of the total number of advisers. Many of these large firms (Professional Investment Services, AMP Financial Planning, Count Financial, Millennium 3 Financial Services etc.) have more than 1000 financial advisers working for them and are characterized by distribution alliances/strategic shareholdings with large investment management firms/life offices.

3. Top five dealer groups in Australia

Key developments within the industry

• This is following similar developments within the UK and Australia.

• Anticipate a massive reduction of independent advisors running ‘one man shows’.

• IFA are corporatising: IFA companies will typically include 15-20 planners with a national footprint.

Larger independents firms buying

smaller independents

• Currently there is a ‘turf war’ within the industry, with service providers offering advice services and independents developing their own solutions.

• Product providers have started buying a stake in the independents (either full ownership or minority ownership).

Product providers buying a stake

in the independents

• Dramatic reduction on third-party providers and move to “on-balance sheet” solutions.

• Banks have favoured in-house products over third-party products.

• Bank brokers are therefore becoming targets for other corporates, as they are enticed by a larger product portfolio and attractive fee sharing arrangements.

Banks narrowing third-party

product suppliers

Key developments within the industry

• Average age of FAs is 52 and are desperate to sell their books or move to a structured business, to ease the administrative burden. The tied model is set to grow and books will become cheaper.

• The younger generation of advisors may start out in the tied model to gain experience.

The tied financial adviser model

forecast to grow

• In recent years South Africa has seen new multinationals, such as AON, enter the market.

• The aim is to use South Africa as a platform to get into the rest of Africa.

• Multinationals play a bigger role in Africa and further commoditise the South African market.

More multinationals expected to enter South

Africa

The different “independent” models emanating in South Africa

Semi-tied

• FA operators under product provider’s licence.

• Limitations in what the FA can sell.

• FA receives on-going business support.

• Contractual agreement, book is retained by FA.

Dealer Groups

• Product provider buys 100% stake in dealer group.

• IFA’s business is positioned as independent.

• IFA licenced under dealer group and not product provider.

• No limitations in what can be sold; there is an expectation that IFA should support shareholder.

Minority Ownership

• Product provider buys minority stake in IFA, e.g. 30%.

• Both parties share in the dividends and commit to grow the business two to three times greater than initial investments.

• Assistance in business management and coaching is important.

• No restrictions in products sold.

Partnerships

• IFA signs contractual agreement to partner with product providers.

• Rebranding takes places.

• IFA agrees to sell business to product providers at a future date.

• In exchange product provider commits to grow the business and give business support.

• No restriction in the products IFA can sell, but on corporate’s licences.

Large Independents

• Independents buying smaller independents and gaining national footprint.

• These companies are starting to develop their own solutions.

• Either a stake in business is purchased or the entire business is purchased.

• Business is rebranded.

• No restriction in products that can be sold.

Across the models reviewed there was an understanding that the IFA would support the service providers solutions.

Thank you