Sir Callum McCarthy’s recent challenge to the long term savings industry to come up with an alternative business model to better meet consumer, adviser and provider needs is timely and the industry must respond positively, says Otto Thoresen.

Sir Callum McCarthy’s assessment of the issues currently affecting the industry made grim reading for most people involved in the long term savings sector. No one would dispute that reform is required. His words resonated with those of us who are already actively considering what can be done to improve the way the industry works to create a “virtuous circle” outcome for consumers, advisers and providers alike.

Let ‘s not underplay the positive aspects of the industry. Current business models deliver excellent outcomes for many consumers. Those who seek out professional advice from efficient advisers and who as a result make well judged long term investments for their future with leading provider firms are already well served.

But there is considerable scope to improve things. I hope Sir Callum’s remarks will galvanise all sides to think more creatively about how we can best serve consumers’ long term savings needs in the 21st century. If we get it right, we can make a real difference to people’s lives, including their prosperity in retirement.
 
Sir Callum suggested that the solution to the current issues may lie in finding a new supply chain model. I agree: thinking differently about distribution and advice is essential to meeting the changing needs of our customers and to bolstering our industry’s reputation.  But the nature of the long term savings challenge is such that addressing the supply side on its own will not make a significant and sustained impact. AEGON believes that lasting progress will only be achieved by making changes to the demand side as well as the supply side of the equation, creating a virtuous circle where demand and supply interact effectively. We also believe that not one but probably several new models are required to enable the industry to reach different segments of the market.

On the demand side, it is financial capability that requires more attention. There can be few other markets where there is such an imbalance between the consumer and the manufacturer in terms of knowledge and understanding of needs and what solutions can best meet these needs. The FSA has committed £20 million to this, but more effort is required – and from providers as well as Government. It’s not just how much is spent, but how we spend it and how we champion the concept. Money spent wisely now will save future taxpayers many times as much in support of an under-funded ageing population.

Better informed and more engaged consumers lead to greater demand for long term savings products, which should lead to greater competition, driving down costs and forcing advisers and providers to become more customer-centric in their thinking, which will lead to better propositions.

But it’s hard to avoid Sir Callum’s conclusion that change is needed. It’s not true to say that “fixing” the business model alone will solve the problem, but we do need new models – improved models to serve our existing market better and complementary models for people who want to be our customers, but are not.

In recent months, momentum has been building behind the concept of generic advice as an entry point for people  to address their financial circumstances in the broadest sense – a service which would educate people and pinpoint their needs. This has the benefit of both addressing low financial capability and in the short to medium term, encouraging new customers into the market.

Beyond generic advice, we must look to promote consumer confidence in the industry through greater transparency and understanding of what people are buying, and what the charges represent. Importantly, we must design products and propositions which genuinely meet customer needs and reflect their lifestyles – now and in the future. The concept that advice has a value and should  be paid for, whether through commission or fees, needs to be more widely accepted.

We need a range of models, not just one, to reach the different segments of the market. We need to improve the robustness of the independent financial advice sector by encouraging IFAs to build strong businesses, looking to attract new customers as well as tending to their existing clients.

At the same time, Sir Callum must accept that while the IFA model works best for many people, offering quality opinion, information, encouragement and bespoke solutions and a variety of ways to pay, others may need different solutions.

We must critique the customer experience of the industry as it stands and look at where there is scope to make things simpler, more transparent, and just plain easier for people to save. We must look at remuneration, charges, capital risk and return. Sir Callum must be prepared to put the regulatory model on the table at the same time, so we can look for regimes which reward well run businesses, and new models which safeguard customers.

The long term savings market is reaching a critical stage in its development and it is time for the industry to take the initiative in shaping the next stage in our evolution.

Otto Thoresen is chief executive of AEGON UK