Continental ambitions remain

Adam Courtenay describes how Aegon subsidiary Scottish Equitable is gradually changing its distribution model from Anglo-Saxon-style broker sales to the pan-European bancassurance system.

Many companies’ dreams of distributing financial products to wealthy individuals across Europe have turned into nightmares. Critics have interpreted last year’s exit of Dutch financial services provider Aegon from Italy as a rude awakening into the real world and as a sign that it has failed to make inroads in Europe. But Aegon subsidiary, Scottish Equitable International, begs to differ. Despite having closed its Milan office to concentrate on what it now sees as a core UK market, the firm still has some continental ambitions. These include a distribution agreement with a Belgian bank to sell products there. And it has learnt valuable lessons about using the all powerful European banking networks to boost sales. Product design boffins blame the closure of the Milan branch on Italian political considerations. Namely tax reforms from prime minister Silvio Berlusconi’s government, which have rendered many international financial planning products redundant. This is despite the fact that Aegon managed to bring in E160m of sales from Italy in 2000. “After initial success, we decided it would be better to focus resources on marketing back in the UK, where our core market has always been,” says Scott White, a spokesman for Aegon UK, the company’s parent. The advent of the Third Life Directive, a key piece of groundbreaking European legislation, was heralded as the brave new era for the free marketing of financial product across Europe. But in reality, few life companies have achieved real cross-border breakthroughs. “We wouldn’t want to be parachuting into a particular territory unless we have a proper operation which is fully authorised,” says Richard Leeson, head of sales for international products at Scottish Equitable. “So we ask ourselves, is there enough business out there in Continental Europe to warrant that? Probably not at the moment.” Mr Leeson says the company’s distribution model is evolving slowly but surely from Anglo-Saxon-style intermediary sales to the continental model of bancassurance, with savings products available through bank branches. Distribution is roughly equally divided between many well-known private banks and independent financial advisers (IFA) at the “high end” of the market. The company has taken large stakes in two boutique IFA firms – Wentworth Rose and Advisory & Brokerage Service – as well as owning the larger firm Momentum, but none of these is mandated to sell their products, as stipulated by local “best advice” rules. However, should these rules change – as the company predicts by the end of the year – the firm intends to buy up to 10 local IFA companies. Currently, much use is also made of London-based arms of big private banks, which already have significant continental connections through their relationship managers. Mr Leeson mentions the likes of Goldman Sachs, Merrill Lynch, Credit Suisse and Kleinwort Benson as well as the private banking divisions of UK retail banks. However, he is loath to mention the nature of each link nor the specific products each bank distributes. So how are sales going? The expatriate high net worth market is buoyant. According to Mr White, sales volumes in the first six months of 2002 were around the same as the corresponding period last year, at around e160m. The firm’s core high net worth market is the “self-owner” of small and middle-sized firms. Despite worldwide recession Mr Leeson believes there is still plenty of wealth in a market not based on share options but the sales of businesses. “Their wealth has less to do with stock market valuations, and more to do with the value of their businesses. It is more protected against stock market fluctuations,” he says. Within the Scottish Equitable fund range, the short-term bond fund, which invests in a range of short-term fixed interest securities, is proving the most popular. “People are looking for security and outperformance versus cash returns,” says Mr Leeson. “If prepared to take a three-to-five year view, this kind of bond fund should offer good rates,” he says. However, its best selling products are a range of portfolio bonds, which are used by expatriates and residents alike as a kind of tax-free “wrapper”. These include the investment bond and the private client portfolio (Luxembourg and Dublin versions). There is also the money market portfolio and the inheritance tax plan. (See below.) Who is in the market for these bonds? Mr Leeson says it is clients with investable assets of between e1m and e10m. The bonds exist not as an investment but more as a vehicle for tax efficiency and administration and can wrap around all manner of assets – not necessarily those run by Scottish Equitable. “We offer a safe haven for investments, where management sits with an IFA, investment manager or with the private banks,” Mr Leeson says. Offshore portfolio bonds are investments wrapped up in a life policy. Unlike other forms of investment they are deemed non-income producing assets. Once money is placed in a bond, all income belongs to the insurance company which issues the bonds – they are then exempt from income, corporation and capital gains tax and for this reason tend to offer better returns than their “onshore” counterparts. In addition, investors are able to withdraw up to 5 per cent of the premium each year for 20 years without any liability to income tax in their home market. The downside is a tendency towards high charges and heavy penalties from UK and other tax revenues for early encashment. Mr Leeson notes that it is not just the UK expatriate market that benefits, the instruments can be beneficial to Germans and their tax position. Often, he says, the amount of wealth being “protected” has a bearing on charges. Offshore it is possible to tailor products to make them bespoke. “We can restructure charges, but we also take account of the possible increase in frequency that the customer would invest – if the customer is long-term, then perhaps rather than having heavy bias towards initial charges, more likely to take charges on an annual basis,” he says.

Scottish Equitable Products: the costs 1 Private Client Portfolio

• Description: whole of life, single premium, linked life assurance bond
• Investment choice: SEI internal funds or any other pooled external assets
• Switching/dealing: 12 free switches per year between SEI funds. Non SEI Assets: dealing fee of Ł30 per sale or purchase of asset plus custodian transaction fee (non SEI assets)
• Minimum investment: Ł120,000 (additional premiums of Ł8000)
• Initial costing option: allocation rate 92.75 per cent (no surrender charges)
• Five year costing option Surrender charges: Year 1 - 9% Year 2 - 7.2% Year 3 - 5.4% Year 4 - 3.6% Year 5 - 1.8% Year 6 - 0%
• Broker commission: 5.75% (renewal terms available up to 1% per annum) 2 Investment Bond
• Description: whole of life, single premium, unit-linked life assurance bond. Investment consists of the bond phase (internal funds) and portfolio phase (discretionary investments)
• Investment choices: SEI internal funds (bond phase); many pooled external assets (portfolio phase)
• Switching: 12 free per year for internal funds
• Minimum investment: Bond phase – Ł25,000 (Ł4000 additional premiums); Portfolio Phase – Ł120,000 (Ł8000 additional premiums)
• Costing option Surrender charges: Bond & Portfolio phases Year 1 - 7.5% Year 2 - 6% Year 3 - 4.5% Year 4 - 3% Year 5 - 1.5% Year 6+ -0%
• Broker commission: 5.25% (renewal terms available with reduced initial)