John Hancock explains why intermediaries are coming full circle, in the light of recent trends in the growth of new composite practices
Older heads may remember a time when families dealt with one insurance intermediary for all of their requirements. Then, during the late 1960s and certainly in the 1970s, that 'one stop' approach began to break down as the insurance industry started to polarise.
That is to say, different divisions were created of general business, life, pensions and investment lines (which became known as financial services), and, to a lesser extent, mortgages.
This separation of different capabilities was market-driven as growing sophistication in general lines and financial services made it harder to serve both sectors.
An even greater pressure on the market arrived in 1986 in the guise of the Financial Services Act.
With financial services activities now increasingly monitored and regulated, it became too costly for any but the largest general brokers to continue operating in financial services.
The tectonic plates that underpinned people's financial lives were drifting apart and that, it seemed, was that.
However, the recent mergers and takeovers of distribution businesses have brought together different sectors in a new breed of composite outlet.
It seems that two powerful forces are pushing the continental drift of financial life back together: one a business imperative and one a change in regulation.
The business imperative springs from the value of customer relationships.
Customers are won at considerable effort of cost and sweat. Once some intermediaries in financial services were guilty of 'loot and burn' marketing, living off the returns of new sales to new clients and rarely taking the time to offer service to old clients.
But most now know the value of strong, long-term client relationships. The business methods of many general insurance brokers, especially the high street practices, have always been well rooted in client service.
David Bruce, director of national accounts and national brokers at Norwich Union, puts this into a business context.
"Intermediaries can see the value of handling more of a client's wealth [within the practice].
"If they can only offer a limited range of services then they are limited as to the extent to which they can cross-sell to existing clients [and so increase the amount of that wealth they can serve]."
It is likely that any merger of two or more practices would deliver cost savings and operating efficiencies.
But bringing together practices from different sectors, for example general insurance and financial services, or even lending will see cost efficiency stepped up a gear by the additional range of services that can be offered to the merged client base.
This leveraging of the value of client relationships is logical and enables the practice to take a broader view of individual client profitability on higher levels of business potential.
The other force exerting pressure on distribution is regulation.
While in past years financial services businesses were subject to the increasingly strict prescriptions of regulators, both general insurance and lending were largely left to self-regulation.
Now that has changed and all three sectors are regulated by the FSA, with the result that one of the biggest differences between distribution in each sector has disappeared.
The principles of sound record-keeping and treating customers fairly are now the new culture for the whole market.
And, returning to the business principle of cost-effectiveness, it makes sense to target as wide a range of market opportunities as possible.
Jeff Herdman, managing director of Oval Insurance Broking, believes that "now all financial services and insurance businesses are trading under the same regime, it makes sense to apply the expertise to handle FSA requirements as broadly as possible".
Mountguard Financial and Insurance Consultants, in St Ives, Cornwall, has always maintained a composite business. And its commercial director Dave Jones highlights further advantages.
"We need only to have one FSA membership, that is, one set of paperwork, one fee and one return.
"It is also easier within the provisions of the Data Protection Act to use client details in both parts of the same business and we incur only one professional fee, such as for accountancy services," he adds.
So a composite approach has advantages for the broker - but does it bode well for the client?
Keith Taylor, managing director of the Regent Organisation, offers his view: "Not only does [a composite structure] remove opportunities for competitors to step in with our clients, but also it is good for the client.
"If clients appreciate our service in one area, they will want us to serve them in the other area."
However, Taylor also believes that the composite structure is easier for a larger business that can focus resources on each specialised area of advice.
This sits well with the 'legal practice' approach that businesses like Regent and Oval use to ensure that clients are always dealing with an expert on the matter in hand but with access to broader capabilities.
This size issue might be seen as a disadvantage to very small practices, although if two small businesses merge, presumably they will each bring the expertise appropriate to their sectors into the new organisation.
Another potential disadvantage of the composite approach is the difference in capital adequacy requirements between the two sectors and according to whether or not an intermediary handles client money.
This could mean that the worst-case-scenario is applied to the whole business.
The FSA does not envisage any change to the capital adequacy requirements in the foreseeable future, although it says it would always try to keep abreast of developments in the market.
An FSA spokesman makes the point that: "Merely setting up a regulator will influence the market but, while we thought this [the re-emergence of composite distribution] might happen in the new order, it is not for us to encourage or discourage such developments.
"We consulted widely on financial resources for the general broker and would not, at present, see any need for that to change [for composite outlets]."
From 'jack of all trades' to specialists and then to serving clients from a broader base to leverage the value of relationships and the cost of regulation: there are still a number of developments left to be revealed in financial services and insurance, but this one looks as if it might offer added value for all sides, which cannot be bad. IT