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Sell up or scale up: Standard Life's post-merger advice plans

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Sell up or scale up: Standard Life's post-merger advice plans

Since the £11 billion merger deal between Standard Life and Aberdeen Asset Management was announced last week, there has been speculation about which direction it will take the two companies and all their subsidiaries. A big question mark now hangs over Standard Life’s advice business 1825.

With the merger transforming its parent business, will the advice arm be sold off, upgraded with robo-tech or abandon its quasi restricted proposition to become a full-on distribution arm for Standard-Aberdeen’s products?

Speaking to New Model Adviser® last week an 1825 spokesman said there would be ‘no impact on our development plan for 1825’ as a result of the deal, adding it still presented the provider with ‘attractive opportunities for growth’.

Under review 

1825 is still a young business and looks a particularly small operation next to the huge asset management company it will be part of. Indeed, the whole process will see the life and pensions focus of Standard Life sidelined in favour of an asset management-based business model.

1825 is also currently loss-making. In February, Standard Life chief financial officer Luke Savage explained this was a result of it still being built up.

However, New Model Adviser® understands Standard Life is undertaking a strategic review of its entire distribution channel, of which 1825 is a part. Indeed, in its annual results presentation Standard Life alluded to changes in distribution.

‘One area where we expect to make a good deal of progress in 2017 is across the distribution teams at Standard Life,’ it said, adding it wanted ‘greater levels of co-operation and collaboration and improved efficiency across our distribution networks’.

A role to play

David Shelton, retired consultant at Stoke Bishop Associates, said the focus had shifted for Standard Life.

‘As EY stated in a recent article, this shifts Standard Life to a large, powerful asset management business with an insurance arm as opposed to an insurance company that manages assets,’ he said.

Shelton said 1825’s role would not change – if you accept that its role was in any case to protect distribution and platform assets for Standard Life. It can do this for the merged business too.

‘The reason for developing 1825 was to protect distribution and assets on the platform. The business still needs to do this and as long as 1825 can grow and develop sufficiently to make a contribution, I believe it will remain in place.’

However, 1825 has always been at pains to be seen as more than just a vehicle for Standard Life Investments. Last week New Model Adviser® wrote about how an overemphasis on its Global Absolute Returns (Gars) fund had caused advisers to leave the business.

1825 said last year it would limit Standard Life investments to 30% of any client’s holdings. It has got itself in a tangle trying to tell clients that its selection of product providers would not be dissimilar to the independent firms it acquired.

Vertical integration

Can 1825 make a profit as a fee-based advice firm, limiting client investments in the Standard-Aberdeen asset management giant to just 30% of their portfolios?

Stephen Gazzard, director of financial advice consultancy S J Gazzard Consulting, thinks so. He said it ‘makes sense for the company to continue to grow its own distribution and build it into a financial planning business that makes money from fees paid for planning services, rather than relying on the underlying product profit contribution.’

Nonetheless, there are clear benefits of vertical integration, in which the provider owns the distribution of its own products, for a mammoth asset management company like the one Standard-Aberdeen will soon become, with combined assets under management of £600 billion.

Jonathan Polin (pictured above), UK chief executive of advice national Sanlam UK, said vertical integration presented a huge opportunity for Standard Life and Aberdeen. But he said the provider needed to go hard or go home.

‘If you are keeping [1825] the size it is today, it is not worth doing,’ said Polin.

‘The advantage in this deal [with Aberdeen] is it has a life company, a platform, a wealth and asset management business and is growing a distribution financial advice business. They have all the parts of the jigsaw for vertical integration and owning all the parts of the value chain.

‘If they are going to be in it, there is no point being in it small. If they want to be in the advice business and have that to augment their platform, they need to get significant scale,’ said Polin.

The only caveat is that although scale would be key to successful vertical integration in this context, growth through acquisitions of advice firms could come second to the integration of two bigger companies over the next couple of years.

Distribution vehicle

Tim Sargisson, chief executive of restricted advice business Sandringham Financial Partners, said 1825 would be a ‘fantastic distribution channel’ that Aberdeen could benefit from – given fund outflows; £10.5 billion over the last quarter of 2016.

‘Aberdeen has struggled in recent years to really engage with an effective distribution channel. I think there is probably more money flowing out of Aberdeen than flowing in,’ he said.

Sargisson sees the Standard Aberdeen deal as one of many in the asset management space, which is creaking under the pressure to drive down prices. Distribution is an important part of the challenge, Sargisson argues.

‘The fund management industry is obviously looking at ways to distribute funds more efficiently, i.e. more cheaply,’ he said.

‘With companies like [passive specialist] Vanguard making their presence known on the UK market with very low total expense ratios and annual management charges it is quite difficult to compete with that if your active funds are expensive and your passive funds cost more than the Vanguard package.’

Does this mean 1825 should aim to become the next St James’s Place?

Shelton said Standard Life already had a good hold on distribution.

‘By definition 1825 will have a wider range of funds to offer even when [Standard Life and Aberdeen] have been consolidated following the merger,’ he said.

 ‘I have not seen any public statement from Standard Life suggesting they wish to build to the scale of St James’s Place, though, and they do not need to do so as they have such a large footprint of IFA distribution.’

Not everyone thinks 1825 will play a core role in the future of the asset management behemoth.

Jack McVitie, chief executive of independent national advice group LEBC, said the advice business was already anachronistic, a hangover from an earlier era in Standard Life’s history, and had become less of a good fit in light of this deal.

‘I was surprised that [chief executive of Standard Life] Keith Skeoch signed off on 1825,’ said McVitie.

‘It feels like a strategy that was left over from the previous regime and I don’t think it has a future. This deal makes 1825 irrelevant to Standard Life plc, I don’t think it can move the dial for them.’

Robo opportunities

The advice market will also be keen to see if 1825 will benefit from the nimble tech developer Parmenion, a subsidiary of Aberdeen, which has its own platform and white-labelled automated advice proposition called Interact.

Gazzard said Standard Life would inevitably consider how to automate and cut the costs of advice but whether Parmenion is the right fit is yet to be seen.

‘The majority of large organisations (and many smaller ones) are considering the use of automated and phone advice so I would be amazed if it was not in the mix.

‘Aberdeen’s ownership of Parmenion’s automated advice technology and [online investment portal] Wealth Horizon make it an interesting development. It may be a challenge to see how the Aberdeen digital strategy fits with Standard’s distribution strategy,’ he said.

Incompatible software?

Shelton is not convinced remote operations will be working their way into the 1825 high-end proposition any time soon.

‘The firms that comprise 1825 are face-to-face wealth managers operating at the “high-net-worth” end of the market where remote contact is secondary to face to face,’ he said.

‘Remote operations have a very different operating model to face-to-face wealth managers and I do not see this being developed as part of the 1825 offering.’

Gillian Hepburn (pictured above), director of discretionary fund manager (DFM) comparison site Discus, sees scope for adding robo to face-to-face service, but it will come with regulatory challenges.

‘The delivery of a broader restricted offering is a possibility and perhaps we will see how the Parmenion platform could be used to deliver a niche DFM proposition.

‘However, it feels like the regulator has an interest in vertically integrated propositions so it will be interesting to see how all that develops,’ said Hepburn.

The choice seems to be between greater vertical integration or to offload 1825. It will have the scale behind it, but we must wait for the strategy.

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