The years I have spent working in the employee benefits market have witnessed huge changes. Of them all, three stand out for me: the slow, steady erosion of defined benefits provision, the rise of personal pensions and the increasing influence of technology. It would be wrong to say that all segments of the employee benefits profession itself have moved at the same pace. A number of ’traditional’ firms were slow to recognize, in particular, the shift from trust to contract. They have been furiously playing catch up in the last few years.
The rise of GPPs did allow a proliferation of smaller corporate advisers to enter the market. These firms bore little resemblance to the old school and followed a very different remuneration strategy: commission or commission offset. In playing catch up, a number of traditional practices have also now, perhaps ironically, embraced this remuneration strategy, particularly during the current deep recession.
But the changes that now rapidly approach will demand a much more nimble response and for those who either don’t or can’t plan for the RDR, the future looks daunting. And this time around, I believe it is both the new breed of corporate advisers as well as the traditional players who will face significant challenges. On their own the RDR and auto-enrolment would each be game-changers. Their near simultaneous arrival is unheralded and demands we all constantly challenge ourselves as to how we add value for our clients and at the same time operate a successful business model.
The consolidation we have seen in the market to date is as nothing to that which will follow in the next few years
I believe there are fundamentally two key questions for employee benefits consultancies and corporate advisers to ask themselves: how diversified are you, and are you worth it?
The area where the RDR has the greatest impact is clearly advice on contract-based schemes. Firms who derive a large percentage of their earnings and profit from this area of advice are clearly the most exposed. In my view, the RDR is actually only accelerating a trend. Employers need a much broader degree of support across their existing and legacy benefits, so the one-trick pony was bound to become an endangered species.
However, delivering high quality advice across health, risk, flex, TRS, actuarial, investment and so forth is no mean feat for a smaller firm. Each has complexities that demand specialists so the transition to a multi-disciplined practice will be quite some task.
It’s one of the reasons why I believe that the consolidation we have seen in the market to date is as nothing to that which will follow in the next few years.
And so to the question of the value a firm brings. A number of years ago, I implemented a discipline at my firm to only work with clients on the basis of an explicit Terms of Engagement providing clients with a menu of services and costs.
Clients were given clarity and a choice of payment methodology through fees or an explicit offset arrangement. I don’t claim some great RDR foresight; it is simply that I believed, and still do, that this is best practice.
Offset has proved more popular in the last couple of years as employers seek to minimize outgoings. A significant factor in this is, of course, the existence of factored commission: the addition of a few basis points to the annual management charge is seen as palatable, especially as the price is often still much lower than the individual could obtain personally.
However the new consultancy charging option, with high front end costs levied on contributions will not, in my opinion, be a tenable alternative.
Fees will have to, over time, become the predominant practice in the GPP world as it has been in the trust-based market. Those who have worked on a high level of upfront commission justified by a series of new joiner meetings, must question themselves as to what the value of their proposition is to a client and whether the client would agree with that valuation. This becomes even more pressing with auto-enrolment arriving almost simultaneously.
The questions that beg to be asked are whether you are delivering real savings, greater engagement, comprehensive management information, intellectual value; in short, are you creating a return on investment or simply adding to the cost?
But it shouldn’t require regulatory change to bring these questions to the surface and if the RDR helps to deliver a better profession supported by prudent long-term finances and competing on value across a broad range of consultancy and technology solutions then I, for one, cannot wait for 2013.