Magazine Issues » February 2012

INSIDE VIEW: Adopting orphan assets

OrphansA number of customer accounts will be 'orphaned' when changes caused by the UK's retail distribution review are enforced. Karen Bond explains.

With up to 40 million customer accounts expected to be “orphans” following the retail distribution review (RDR) in the UK, more firms are considering “adoption”. Orphan clients are customers that either decide to discontinue using an existing advisory relationship, or who no longer have an active advisory relationship, for example if their independent financial adviser (IFA) goes out of business.

But what are the options?

On the one hand distribution influence is expected to concentrate into fewer and larger firms as smaller IFA firms leave or merge, and winning platforms and fund managers emerge. Therefore, distributors, product manufacturers and platforms are carefully prospecting for the right post-RDR partners.

On the other hand, the possibility of lacklustre consumer appetite for adviser charging, particularly for ongoing service, and a strong interest in unlocking the potential in the mass market segment is leading many product manufacturers and platforms to consider developing or enhancing their direct-to-consumer propositions.

Successful post-RDR direct-to-customer offerings will need some key ingredients: scale to leverage competitive execution-only pricing, cost effective client acquisition and strategies to retain and maximise the value from existing clients. And this is why some firms are gambling on orphan clients.

As mentioned, orphan clients are customers that either decide to discontinue using an existing advisory relationship or no longer have an active advisory relationship. Some firms have broadened the definition to include a lack of contact between client and adviser for set periods of time.

So what are firms specifically interested in?

First, there is a significant amount of orphan clients and their numbers are expected to grow. Our research in the life industry has estimated that approximately 25% to 30% of policyholder accounts currently have orphan status – that is, around 30 million accounts in total – and evidence submitted to the Treasury Select Committee, which is investigating the impact of RDR, has suggested that up to ten million customers are likely to become orphan clients as a result of RDR.

Second, orphan clients already have a history of buying financial products. There is a threat to existing holdings, which might come under pressure from another provider offering a post-RDR charging structure, but also an opportunity. Clients who already have financial products generally have a high propensity to purchase additional products and are more likely to have available assets to invest.

Mixed response
There are dependencies that make developing a direct-to-customer proposition not as simple as it sounds:

  • You have to be confident that there is value in the client base for a direct-to-customer proposition. This may require detailed analysis and segmentation. 
  • You have to be able to offer a compelling proposition, including competitive pricing and a nimble, technology enabled delivery capability. Competition will be fierce. 
  • You have to be able to identify orphan clients. Choosing who you contact and how is a sensitive matter as getting it wrong is likely to frustrate both your clients and your distribution partners.

There have already been a number of launches of new or enhanced direct-to-customer propositions targeted at orphan clients, such as Aviva and Friends Life. Most of these have been “soft” launches with little advertising to avoid raising concerns from distribution partners and other existing clients. Others are opting to do nothing and monitor market developments, which might be the right choice if you don’t think that direct-to-customer suits your product set, your clients or your delivery capability.

However, you risk leaving yourself open to an eroding client base and missing the opportunity to gain sufficient market share.

There are also some innovative challenger options emerging such as, which is looking to benefit from greater awareness of investors and increasing numbers of orphan clients. Some firms are investigating the possibility of paying off the trail commission paid to distributors and looking at how they might be able to “switch off” trail commission payments in certain circumstances. While these customers would not be classified as orphans today, ending the stream of trail might clear the way f­or a later direct-to-customer approach.

What is clear is that firms need to give careful consideration to the commercial opportunities and threats associated with orphan clients.

Karen Bond is a director in the financial services practice at Navigant Consulting

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