PRESENTER: In this Akademia learning unit we’re looking at business protection in the SME market. Legal & General has just published its sixth biannual state of the nation report on the topic, and its Head of Specialist Protection, Richard Kateley, is in discussion with Financial Services Consultant, Martyn Pask, on the major findings. Now for the first time the study included financial adviser firms themselves in the research. So let’s look at the main learning outcomes: firstly, the current awareness and take-up of business protection products amongst SMEs; the opportunity that exists for advisers to develop in the business protection market; how to develop SME client opportunities; and how adviser businesses’ business protection requirements differ from those of other SMEs. Well we go over now to Richard Kateley and Martyn Pask.
MARTYN PASK: Richard, so we’re here today to look at the L&G biannual state of the nation report for SMEs. So, let’s start off by, could you tell us a bit about why you do it as a provider, what’s the reason for it?
RICHARD KATELEY: Yes, I mean there’s several reasons we do it. I mean the first one is really to gauge the potential in the marketplace. To see if there is actually a marketplace for business protection, and obviously there is, which is why we do the report on a regular basis. We’ve done it since 2009. Second one is to judge awareness out in the marketplace among SMEs. Do they actually realise what business protection is, do they know that their businesses are running a risk with their human capital, i.e. their employees and their business owners. And then also to help advisers understand those shortfalls in awareness so they can go out and talk to clients.
So we’ve just found that doing this research just helps both us and financial advisers hopefully expand this market, and hopefully grow it, because it is a huge market, and I think without that awareness and that understanding then we’re not going to go into it and help business protect themselves.
MARTYN PASK: And have you noticed much change over time or?
RICHARD KATELEY: Well, it’s got bigger. The market, if you look at the government stats at the moment, there’s about 5.7 million private sector businesses in the UK. And what’s really interesting about that is that 99% of them are what we class as SMEs, i.e. they have less than 250 employees. But more than that 96% of them have less than 10, and that’s probably the market we’re going for. Because if you run a company with less than 10 people and you lose one person, you lose the business owner, you’re not going to have the resources to cover that. So that’s really the area that we want to look at. So the market’s got bigger. In terms of awareness no, we’re still find that there’s a huge gap in awareness among business owners about the risks that they could be running and how insurance solutions can help them.
MARTYN PASK: Yes and I think that’s a really good point isn’t it? So from an adviser point of view I think the research is really useful, because firstly it identifies the size of the market and the opportunity that a lot of people are missing out on. But also I think if people are going to get into it it’s a conscious decision. So it’s not something that most advisers do as part of their day job.
RICHARD KATELEY: I mean did you find it a useful report to read, did it help your…?
MARTYN PASK: Yes, I think from that point of view, so as well as the market it’s a case of what are the deficiencies, so where are the gaps that advisers should be talking to their clients about. It’s very clear isn’t it that a lot of business owners are under-covered or lacking in awareness. So I think as we go through this it’ll come out that we see what the difference the advisers can make, so great opportunity. So I think one of the things, we see a lot of reports on these sort of things come out, but there’s always a degree of scepticism that did you ask a couple of people down the pub, so what are the credentials of the survey?
RICHARD KATELEY: Yes, we always try and make this report quite comprehensive. So we spoke to about 700, just over 700 business owners across the UK. We tried to make sure we had a spread of both industry and age of the businesses. So we had businesses that were under a year old, companies that were over 20 years old. The only restriction we put on the research was that we wanted to reduce the percentage of sole traders. Because sole traders make up about 65% of SMEs in the UK, so we didn’t want them to skew the figures a bit, so we restricted them to 25%. But the other thing we did really interestingly this year is we isolated out 100 SMEs that were actually financial advisers, which we thought would give us a good twist.
MARTYN PASK: Yes interesting. Why did you do that, what did you think was going to come out?
RICHARD KATELEY: Well, we wanted to understand if a business owner, if you ignore the fact they’re a financial adviser, if a business owner with a much better knowledge of the risks and the solutions that could be put in place, whether they would actually be better protected. So we thought it was a good measure if you like.
MARTYN PASK: And I guess the million dollar question is did they then or are they better protected?
RICHARD KATELEY: I would have to probably say yes and no; awareness-wise definitely. Business owners that were financial advisers had a much better knowledge of the market. They understood that director loan accounts needed to be repaid on death, so lots more of those; whereas, if you look at a non-financial services business owner, very few of them knew that it needed to be repaid. They understood about key man policies and debt protection. But I would have to say that the actual coverage that they’ve cover, i.e. have they taken out the cover themselves, probably the jury’s still out. It’s interesting.
MARTYN PASK: Well it’s interesting, well basically it means one or two things doesn’t it, either they’re not practising what they preach, or potentially maybe the real answer is that actually their structures and their circumstances are slightly different. So I think traditionally advisers and particularly the smaller adviser end have tended to be lifestyle businesses. So maybe the need and the requirement or as they see it is less than it would be for a more established company.
RICHARD KATELEY: Yes, I think you’re right. And also it’s like the old analogy of a builder isn’t it? I’ve got a neighbour who’s a builder and his wife is always complaining that he never does stuff round the house, but he’s always going round to other people’s houses and doing jobs. And I think financial advisers sometimes, especially when I talk to them, they do exactly the same thing. They’re too worried about looking after their customers and client, and they forget about themselves. And they forget that they are a business themselves and they probably need to do it. Which is why we quite often say when people are trying to get into this marketplace, look at your own business, that’s the best place to start, make the mistakes in advising yourself, or test yourself just advising yourself. Look at your business, do you have key people, do you have ownership, are you going to have an issue?
So if you can start with yourself, because I always think it’s much stronger if you can go to a company and say well we’ve got it, that they will buy into it. If you go to a company and say, and they say well have you got it? And he says well no. Well why should I have it? So it does make you more congruent I would say. But where the research really came strong is where, the difference between business owners that had a financial adviser and those that didn’t have a financial adviser. We found that businesses that had a financial adviser, they had much better knowledge. They knew about director loan accounts, more people were covered for debt that they had. They knew, much more of them knew about relevant life plan than companies that didn’t have a financial adviser, just by relying on what they’d read in the paper etc. And I think the interesting one for me was that if you look at the difference between a financial adviser and a business owner that had a financial adviser, if you look at their personal protection, when we talked to the financial advisers, less of them had personal protection than their clients did.
So again going back to that analogy we said earlier they’re looking after their clients and not themselves. And it wasn’t a massive difference. It was I think 83% of financial advisers had personal protection, as opposed to 90% of other business that had a financial adviser. But it’s still a marked difference. But for me what that indicated is this is a market where you have to have knowledge and advice is key. And if you’re a financial adviser businesses aren’t going to come and knock on your door for this business, you have to go out and be proactive. And those that are proactive will find that there’s a good take-up of it.
MARTYN PASK: So the bit that really interests me about this then is that if, what the evidence is showing is that firms that have advisers are a lot better covered, but where are they getting them from? So what’s the transition from a client having a personal client into getting into the corporate market, is there evidence that that’s the route that they’re travelling?
RICHARD KATELEY: Yes, I think it’s the easiest route as well isn’t it? So if you’re a financial adviser and you’ve got a load of clients in your client bank, the likelihood is they are either going to be working for an SME or they’re going to own an SME. So you might as well go and dig into your own client bank and go and see what’s in there first. And then when you’re talking to them, go and talk to them about relevant life plan or whatever, you can then talk to them about business protection. If they’re working for an SME, then ask them if you can go and talk to the bosses and get in that way. There are a few obviously financial advisers that specialise in this marketplace, and they purely go out and look for businesses, which again is what you can do. But for me it’s start with your own business, look at your own client bank and see what you can find and then get into it that way.
MARTYN PASK: Yes, it’s just that we’re definitely missing a trick aren’t we?
RICHARD KATELEY: I think so.
MARTYN PASK: Because if there are more people, more business owners who’ve got personal financial advisers that have got corporate financial advisers, then we can’t be converting all of them into the corporate side.
RICHARD KATELEY: No, exactly right.
MARTYN PASK: So just back to the research then. So what were the takeaways for you, so from an adviser perspective, what do you think are the most important things?
MARTYN PASK: So for me there’s three. So the first one is there’s no negativity out there. So business owners don’t know about this market. So actually when you talk to them they don’t say well I’m not interested. They just say oh that’s quite interesting. So you’re pushing against an open door to start with so don’t be worried about that. The second one was that advice is king. We found that of the business owners that had business protection, 73% of them only took it out because they’d sought advice. So it’s really powerful that it’s not a self-awareness thing. People aren’t going to come and knock on your door. So if you want to get into this marketplace you’ve got to be proactive, go out and talk to businesses. And I think the final one, which was really shocking, was that of all the businesses we spoke to 52% of them once they’d thought about it. Actually said their businesses would not survive a year if they lost a key person or a business owner.
Now that’s a massive figure, and I was talking earlier about there’s 5.7 million private sector businesses in the UK, 99% of them are SMEs, and then 96% of them have got less than 10 employees. If we’re thinking over half of those would go out of business in a year if they lost one person, it’s just huge. So the risk is there, we just need to go out and talk about it.
MARTYN PASK: And has that changed? So over, since 2009 when you started doing this research, has anything happened in the product development or anything that’s changed the market is operating?
RICHARD KATELEY: Not really, I mean the market itself, I suppose there’s been a couple of changes; relevant life plan is the biggest change that’s come into the marketplace. That was launched in 2009. Advisers have really embraced it and it’s beginning to grow. I mean it now outsells the other forms of business protection, at L&G anyway, in totality, so relevant life plan sells more than key man, director, partnership, that sort of stuff. But I have a feeling that’s down to people being more comfortable with selling relevant life plan, which is relatively a simple product. But I think they’re missing a trick and they’re not then asking the supplementary questions. You know, if you’ve just saved a company director half the cost of their life assurance because of the way relevant life plan is treated or paid, why not talk to them and then say well have you got any debt, have you got ownership, have you thought about it, if you think there’s somebody very key in your business. So that’s been a big change, but other product-wise no.
I think for me the other big area I guess is other providers have got into the marketplace, which is not brilliant for me because I’d like the market to myself. But it’s great for financial advisers. Because there’s more competition, there’s more proposition, there’s more resource that people can go and attack. And it also shows that it’s a very healthy market. Insurance companies don’t go into markets unless they think there’s an opportunity, and we all think there’s a huge opportunity, and hopefully this report shows that in abundance.
MARTYN PASK: Yes, at this stage all you’re doing is you’re growing the market. So actually if all the providers are providing education and hopefully improving adviser confidence, as you say it’s actually, once you’re confident about the product, and relevant life plans are pretty much a no brainer aren’t they, it’s pretty straightforward. So once people understand it, then it’s got to make a lot of sense. So that’s in terms of the product. What about in terms of legislation, has anything changed in the last 10 years that’s?
RICHARD KATELEY: Again legislation has been fairly benign with reflection to business protection, because it’s, we’re talking term assurance, critical illness and trust, so a lot of that stuff hasn’t really changed. We’ve had changes obviously in product terms of critical illness etc. But I think the things that have affected our sales are things like lifetime allowances. So lifetime allowances keep changing, and the good thing with a relevant life plan obviously is that it doesn’t affect your lifetime allowance so that helps with the sale. So if you’ve got people with big pension pots, then they might want to look at a relevant life plan as opposed to a death in service scheme, which would obviously affect your, or taken into account when calculating a lifetime allowance. And auto-enrolment, I mean you know about this market probably more than I do, but auto-enrolment I think has really opened the market for businesses seeking financial advice. And then the advisers being able to get in to talk to them about auto-enrolment, because they had to do it, then lead on to other discussions. I mean is that what you found?
MARTYN PASK: Yes, I mean it was massive wasn’t it, because there was a whole sector of the market that wasn’t catered for by the traditional EB consultants. So financial advisers who had business owners as personal clients, they were an obvious route in to get some advice. So although auto-enrolment has ended in terms of all the staging dates have passed, and everyone’s gone through that process, you’re still seeing obviously new startups coming in. But probably more importantly now there’s a big secondary market happening. So as assets sitting within pension schemes grow, you’re seeing a lot of competition; so providers trying to win business from other providers because now the prize is much bigger.
RICHARD KATELEY: Right.
MARTYN PASK: So I think it’s still a big opportunity. And if advisers want to use auto-enrolment to get into corporate market and therefore into business protection I think it’s still a big avenue.
RICHARD KATELEY: And you were talking earlier about finding clients etc. The other thing I think about auto-enrolment is it doesn’t just allow you to talk directly to the company. You can talk to their other professionals, their accountants, their payroll companies, who are probably going to be doing some of this work in the background. So when you’re talking to your company you can talk to their payroll, because again a lot of small companies don’t have their own in-house payroll company, they go and use somebody else. I’ve got a friend who runs a payroll company. She’s got a client bank of about 250 companies. So for an adviser to approach her that’s 250 companies he could go and attack or she could go and attack.
MARTYN PASK: Yes absolutely.
RICHARD KATELEY: So really useful.
MARTYN PASK: Well and also I think the companies who adopted pension schemes for auto-enrolment are now reviewing that, because they’re getting lots of questions and employees, and most companies don’t have a solution for employees where they can ask questions or so and so. That’s often getting routed back to payroll or to accountants and so on, again great opportunity for financial advisers to step in and provide a service. So that’s great. So I mean just going back to the research then. So in terms of the product areas that you looked at in the research, what were the key ones?
RICHARD KATELEY: Well it’s the core ones really. You’ve got key man, sorry key person, debt protection, shareholder, relevant life plan, which we’ve already spoken about. So those are the main ones. I mean relevant life plan isn’t a business protection policy as such, it’s a family protection policy, but we clump it together with the same things. So that’s what we looked at. But it wasn’t just the products we wanted to understand. We wanted to understand the awareness and the awareness to risk: do they think about human capital within their business as a risk to their business? And then also did they have a plan B, do they know, had they thought about what might happen if the worst was to happen and somebody died within the business, have they got a plan B, have they got a disaster recovery plan.
MARTYN PASK: Well let’s start with the easiest one first, which is debt, because obviously everybody gets the concept of covering debt. What did the stats show about that?
RICHARD KATELEY: Just over half of the businesses we spoke to had some form of debt. And we’re not talking small amounts of debt; I mean the average debt for SMEs in a whole is about £176,000, director loan accounts on their own was about £169,000, so not small figures here. Worryingly only two in 10 actually looked at having an insurance policy to cover that debt. So unlike mortgages maybe where people might think about it, they didn’t think about covering that debt. Now whether that’s because it was smaller amounts and not bigger amounts, but it’s still a bit of a concern as far as I was thinking. So that’s the main area that I thought we’d come up with. Director loan accounts, there’s very little consideration about whether they need to be repaid. There’s a lack of knowledge there: 28% of all business owners didn’t know that they had to be repaid on death, but if I lent our business money, if you and I owned a business, I lent money to the business and I died, my wife’s going to want that money back on my death.
MARTYN PASK: Quite.
RICHARD KATELEY: And if that was £169,000, where are you suddenly going to find £169,000 to repay my wife, could put a lot of pressure on. So debt is a huge one and probably the most obvious one for advisers to get into, because again if you’re a mortgage adviser, somebody comes in and says I want to raise some money against my house to fund my business, you think OK maybe that should be key personal debt protection rather than a personal protection situation.
MARTYN PASK: But I mean I guess it’s something to do with the fact that a lot of business owners view personal money or personal debt differently to the corporate side. Because obviously as I said earlier it’s much more personal when it’s family orientated so you’re not going to leave your family unprotected.
RICHARD KATELEY: You would hope not, but you’d be surprised.
MARTYN PASK: Some people do, but generally they shouldn’t should they? But obviously it seems to be less important in protection. So again that must come back to education.
RICHARD KATELEY: Yes it does. And I think that’s something that advisers can play on a little bit, because smaller businesses do have this parental responsibility, the owners of it. And so if you take a big company, take our CEO, he probably doesn’t know who I am; whereas, if I worked for a company that had 10 people my boss would know exactly who I am, and my kids and my family and everything else. So there’s that parental responsibility, rather than the corporate responsibility. So owners of small business we tend to find do have that sort of, not guilt but parental responsibility to look after everybody in the business.
MARTYN PASK: And obviously the other one is that obviously in situations of a limited company, they’re protecting themselves, but very often a lender will require a personal guarantee. So what happens there and what happens on death?
RICHARD KATELEY: Well, interesting, when we looked at the asset securing side of things, we found that, we said that two in 10 had an insurance policy, the rest tended to rely on either securing against business assets, but not very many: about 28%, something of that nature. Because if you think about most modern companies, they don’t actually own anything; they probably work in a rented building, regional office, service office, something like that. They probably rent their cars and their equipment. So actually they don’t own anything, or they might work from home. So then we found that people were actually, almost 50% of them were actually using either personal guarantees or securing personal assets to secure business debt. So they’re obviously then putting their own wealth at risk.
Now you asked what would happen on a personal guarantee, it’s basically that, you’re guaranteeing your own assets to secure that debt. So if there’s no assets within the business, then your creditors will come after your personal assets. Which I know my wife would not be very keen if somebody knocked on the door and said we want the car back.
MARTYN PASK: So the second product area that you talked about was key person protection, what were the basic findings?
RICHARD KATELEY: Big ones there, it made me laugh actually. 99% of the businesses we spoke to said they had a key person, so obviously 1% said they weren’t key. We were interviewing them and they said they weren’t key. Most people think themselves are key to the business. But very few people had actually thought about insuring their key people: 18% of people had taken out some form of key management. And I think it’s down to the fact that people just don’t think about insuring people. They think about insuring things if you like. We insure cars and machinery and buildings. But when you think about it those things can all be replaced. You can easily go and rebuild a building if it burns down, or you can replace a car if it crashes, or a computer if it crashes; it’s much more difficult to go down the shop and buy a new key person. So people just don’t think about those things.
There was a lovely quote by Henry Ford that said you can take away my factories, blow up my buildings, but leave me my staff and I will rebuild my buildings right back up again, which is really key, because people are the things that make a business. It’s not the things that we have, but as a society we tend to insure things and not people, and we really need to consider the people.
MARTYN PASK: Yes absolutely. And in terms of financial advisory business, were they similar to everyone else or were they different? Because again going back to my previous point that a financial adviser is often the key revenue generator as well as the founder, the owner, the chief exec, the chairman.
RICHARD KATELEY: No, we found exactly the same. There wasn’t a massive, a much better awareness of it, but again hadn’t really, wasn’t a massive difference to normal SMEs insuring key people. As I said earlier we found in general it was about 18% of people that actually considered taking out any key man insurance, or key person insurance sorry.
MARTYN PASK: So there are lots of non-human, non-business related risks, and they seem to be the things that are more commonly protected than.
RICHARD KATELEY: Yes, exactly right. If you look at all, we asked about, who had disaster recovery plans, and a lot of them had disaster recovery plans, but when you look about what they covered in them, it was buildings burning down, buildings being broken into, car insurances, IT security breaches; those sort of things were the top three that they were, the three or four that they were looking at. And insuring people was much further down the list. So again one of the things we always say to advisers, when you go into a business ask them about their disaster recovery plan, do they have one, because a lot of companies won’t have one. And if they don’t, if they do have one then is the death of a key person or a business owner part of that disaster recovery plan, if they say no, say well think about it, would it be a disaster if that happened. Most people would say yes it is then it should be in your disaster recovery plan. What are you going to do if your head sales person or your second in command happens to have a cancer or die; that should be covered.
MARTYN PASK: Yes definitely.
RICHARD KATELEY: And that’s what advisers can do, raise that awareness. It’s all about raising awareness.
MARTYN PASK: Yes, inevitably advice is all about solving problems isn’t it, but if they don’t know they’ve got the problem in the first place, which they often haven’t realised or articulated, then they don’t know that they need the solution.
RICHARD KATELEY: Exactly, I mean one of the things that we ask, we asked them what their biggest risks were. And 63% said that losing a key person was their biggest risk; yet 15% said their buildings being burned down was their biggest risk, yet they probably insured their building but not their people. Only 3% said their biggest, number one biggest risk would be their buildings being broken into; yet they’ve probably got contents insurance, but they haven’t insured the key people. So why, as a society we tend not to think about ourselves. Human nature, we don’t want to think about death and all the rest of it, but actually we should do, and we should walk into the boardroom and say have you thought about it.
MARTYN PASK: Moving on from that then, so onto share protection, which is probably the one where the biggest numbers get involved, because obviously this is the backend and the potential sales of business. What did the research tell us about that?
RICHARD KATELEY: Well again there’s a lack of clear understanding I guess in this market and also a lack of awareness. If you go into a boardroom, most boardrooms have not discussed what’s going to happen if one of them dies, and what’s going to happen if a shareholder dies, who’s going to buy those shares off the family. We found that about a third of the people that we spoke to said that they assume their fellow shareholders would buy the shares, which is a great situation. It sounds like they’ve thought about it. But actually what an adviser needs to do is ask that supplementary question: how are they going to do that? Because when we did that, 52% of them, or around that 52% mark, said that actually they’re going to do it from their personal wealth, which is (a) a lovely situation to be in. But how much are they going to need, do they know what they’re going to need in some date in the future, are they going to be able to raise that wealth?
So actually just by asking those supplementary questions can unstitch what sounds like they’ve got a plan. We also found that very few actually had life insurance policies put in there. Some people said that my relatives are going to inherent the shares and come and work in the business, which is great. But you have to consider that if you’re a majority shareholder you can do that, because you’re now effectively the boss. But if you’re a minority shareholder you don’t have an automatic right to go and work in that business. So that might not work. So it’s just going through those steps of asking them what might happen if this happens, it’s the what-ifs, and most people haven’t thought about it.
MARTYN PASK: Yes, and I think a lot of people, the answer I hear quite a lot is people say well we’d have to borrow the money. You say well actually if you’ve just lost one of your major assets within the business because someone’s just died, or had to leave through ill health, the chances of you being able to borrow the money are just reduced aren’t they?
RICHARD KATELEY: Well exactly, the bank might say, well the bank are going to know that key person was, that shareholder was key to the business, and therefore might be less likely to lend you more money and actually question whether you can afford the existing money. I mean the other thing we found really interesting is when you talk to people about their wills, over half either didn’t have a will or didn’t mention their shares in their will, or have a specific instruction about what should happen to their shares on their death. So again it’s thinking through the process. And I suppose you said it earlier, they divorce their private and their public life, or their corporate life, and it could well be the same with wills.
MARTYN PASK: So in that case, so if they are a majority shareholder that could open up a whole can of worms couldn’t it because now, so if it’s not determined who owns those shares, the remaining shareholders are now in business with perhaps the executors of the will.
RICHARD KATELEY: Exactly right, I mean it could be all sorts of problems they’re going to have. Because as you say with a majority shareholding it has to be sorted out, if there’s no will, I mean you might say that well that’s fine, the shares will go to my wife or my husband; but if they both die together, they weren’t married, the majority shareholding now sits with the estate. The executors are trying to manage the estate. The remaining company directors don’t have a majority so they can’t control it. They would have to call the executors in. They’ve got enough on their plate. So it causes all sorts of problems with majority. Even a minority situation is not great, but that majority shareholding is really key. So again advisers can help companies or business owners think about it and say what is in your will, have you got a will.
MARTYN PASK: Yes, I think for advisers this is a big opportunity, because one of the things that I come across and see is that there’s quite a lot of avoidance. So directors, partners within firms, it’s quite an awkward conversation to have isn’t it, because what comes out is that they’ve got different objectives, different time horizons, different timeframes. So actually they’re not really that aligned quite often. And so what they do is they don’t talk about it, so they don’t have a solution. So I think the adviser could play a really good role, a bit like a non-exec type role within the board or within the partnership to help them discuss those issues. Because a lot of the solutions are going to be built around protection or maybe investment and pensions, so the adviser’s actually got the tools to solve some of the problems.
RICHARD KATELEY: It’s no different really to domestic policy. When somebody comes and sees you about a mortgage, they want the mortgage. It’s the adviser’s chance to open up the conversation, say well actually if you’re taking a mortgage out, have you thought about protecting it. So the same with a director have you thought about protecting this stuff. And you’re right, the adviser has such a vital role to play, and that’s what really keeps coming out of this research.
MARTYN PASK: Yes, and I think that’s probably the key thing that reading it, that’s what you want to get across to people, is if you’re not in that market, then you really ought to be because you’re just missing a great trick here.
RICHARD KATELEY: Yes.
MARTYN PASK: Now we talked before about RLP, relevant life plan, as being the bridge. That’s the fastest growing area in business protection, if you call it business protection.
RICHARD KATELEY: Yes.
MARTYN PASK: So what’s been happening there?
RICHARD KATELEY: Well, advisers, as I say they really like the product, because it does almost sell itself. I mean our strapline when we talk about business protection is put life cover on expenses, because you’re getting the company to pay for your personal life insurance, which is great. And because of the way it’s paid it’s more tax efficient that way. But it’s, for me the obstacle and the opportunity here is the lack of knowledge. As I said 69% of people had never heard of it, SMEs that we spoke to. So actually there’s a huge market for us to go out there. Unfortunately accountants don’t know much about it, nor do solicitors. So again if you’re a financial adviser and you’re working with those two professions then go and talk to them.
We had great stories of a financial adviser who came to one of our workshops, and he said he went out and took out his own relevant life plan and his accountant questioned it, what’s this you’re trying to put through the books, and he explained it, and he said oh I didn’t know about that. And he’s now introducing to that IFA a load of his clients, because he’s now seen the benefit of it. So go and talk to other professionals. I think that virtual triangle we always have, the accountant, the solicitor and the financial adviser, we’re so key, especially in this market, we need to work with those guys. Because a solicitor can help us with cross option agreements, the accountant can help us with the tax implications that if they take out a key man policy or a relevant life plan, and the financial adviser can give all that advice to all three parties, and obviously the real winner there is the client, because they’re getting the best service.
MARTYN PASK: Yes, and in my experience accountants love relevant life.
RICHARD KATELEY: When they know about it exactly right.
MARTYN PASK: They all think it’s great don’t they, because obviously anything that’s got a tax angle, then it’s in their interest to be excited about it. So they’re going to want to refer you, they’re going to want to talk to their clients about it.
RICHARD KATELEY: Without a doubt.
MARTYN PASK: One of the other things that comes up that you can enlighten us on is Rysaffe.
RICHARD KATELEY: The Rysaffe rules.
MARTYN PASK: Rysaffe, however you want to pronounce it.
RICHARD KATELEY: Yes, well if you’re a financial adviser into IHT planning, Rysaffe rules can be really, I mean basically all it’s saying is each discretionary trust has its own nil rate band for IHT purposes. Now, so with a relevant life plan we use a discretionary trust. So if you wrote up a million pound relevant life plan in its entirety, if that money is then going into a trust and the adviser is using it for IHT planning, and the money’s going to stay in that trust and it’s going to benefit the beneficiaries over a period, there’s going to be periodic and exit charges. So if you, instead of writing one big policy, if you split that down into say four policies, three at £325,000, which is the current rate of IHT, and one of £100,000, each one of those policies, if you set them up on different days and the trusts have different days, so it can be subsequent days, each one will have its own IHT limit of £325,000.
So that reduces some of the tax burden, but it’s down, for those advisers really that are in IHT planning. They can really use that Rysaffe rule. And we often forget about it, but it’s a really useful thing. It’s a bit more paperwork, because obviously you’ve got to set up four policies rather than one, but it’s part of that financial planning and adding to your services.
MARTYN PASK: Yes, again it’s adding value isn’t it?
RICHARD KATELEY: Yes exactly.
MARTYN PASK: They’re the things that accountants and business owners are going to like. That’s where they’re going to see the value. So I guess bringing all that together in the different product areas. So how active are most financial advisers actually being in this space now?
RICHARD KATELEY: It’s a really mixed bit I think. They could be a lot more proactive out there. Not every adviser is going to want to get into this marketplace, but I do think it’s an area that advisers should look at. They’re all going to have business owners on their books. And what we found is when people come on our workshops is there’s a couple of things that they get concerned about. They don’t want to talk to business owners, but quite often the person that says that is themselves a business owner. Because you said earlier that the business for a financial adviser quite often builds around a financial adviser, they don’t purposely go in and say I’m going to run a business, the business grows around them. So they don’t consider themselves as that. So actually it’s not a huge concern, or it shouldn’t be.
When we talk to businesses in the research, a lot of them have small boards. You’re not walking into 20 people in a boardroom. These companies, 96% of them have got less than 10 employees, so the board is going to be two or three people. So actually it’s not a scary thing. And when we do find it, advisers that just jump in and bite the bullet, do find it’s a really lucrative and lovely market to be in, because the sums assured tend to be so much higher. If you look at our average case size at the moment, our domestic policy is about £30 a month; our business protection is about £100 a month. If you’re going into a company and there’s three directors, you could be selling three relevant life plans, three key man policies, three director share protection policies, so that’s nine policies in one visit.
They tend to work nine to five, so it’s again great, and the business tends to be more sticky. Because you’re talking about the corporate wallet, you’re not competing with Sky TV or the holiday or whatever, it’s a corporate wallet. And I think the other thing that puts some clients off is they think it’s too expensive.
MARTYN PASK: Yes, so obviously what we’ve established really is obviously the benefit here is obvious, so the only real objection people are going to have is cost, and you said that that’s one of the top three reasons why people wouldn’t actually take out some sort of protection. So what are the findings on cost?
RICHARD KATELEY: Really interesting, it’s much more around perception than reality, because we wanted to really nail this one this time. So we actually asked the question, and we gave them a scenario of a £250,000 term assurance for a 45-year-old, 10 years, how much did they think it would cost? And on average they came back and said they thought it was three times more expensive than it actually was. The actual cost was about £18, just over £18. When we asked financial advisers on our workshops, we asked the same question, they usually think it’s double the cost. So actually it is a perception rather than the reality. So once you go and talk to business owners it’s quite easy to get over, because who wouldn’t spend £18 to save their business?
MARTYN PASK: Absolutely.
RICHARD KATELEY: It’s a no brainer.
MARTYN PASK: Yes, so it’s not, so it’s actually just a misconception. So the big objection of cost actually is only there because people don’t really understand the reality of what it actually is going to cost.
RICHARD KATELEY: Exactly, and then the other thing that we asked, a follow-up question to that is, how much would they be willing to spend? Which was quite an eye opener because just about 25% said they would spend over £500 a month; whereas, over half said they would spend more than £50 a month. So actually when you actually ask them they would spend a lot more than they actually think it costs, because remember they thought that it was three times the cost, so it’s around about the £50 mark. So again it’s a good market to get into. And once you explain it to them it sort of gets rid of that issue around price. And again as I said we’re talking about the corporate wallet, not the private wallet.
MARTYN PASK: I think the big part in all this is that you think most people who run business are actually fundamentally, their financial advisers first or electricians or architects or whatever their business is first, and then they’re business people second. So I guess that’s one of the big reasons why they don’t think about these things. So they don’t have that concern because it’s not their day-to-day job is it?
RICHARD KATELEY: No, it’s not exactly. Nobody thinks that anything is ever going to happen to them. We run our businesses. You know, we talk to business owners and they say I’m running my business I’m more concerned about my forecasts. They’re all experts in their own little areas, and they know their own markets, they know how to forecast their profits etc., but death and serious illness is not a great subject to talk about, so they just don’t think about it; same with domestic clients. And that’s where I think advisers really earn their money. Whether it’s in domestic insurance, whether it’s in business protection, it’s going out there and talking to clients and saying look there is a risk there, and it’s gamble you take. You can either insure yourself or not, and most people insure their houses and their cars and their mobile phones. One of the stats came out is you’re more likely to, more people insure their mobile phones in the research that we did than insure their key people. A mobile phone is not going to keep your business going, but that’s what we do, back to those things again.
MARTYN PASK: Yes, so just bringing all that together, and so what’s your advice, you see lots of financial advisers, you do lots of training on these things, so for somebody who wants to develop this market more or get into it for the first time, what are the key things that you think?
RICHARD KATELEY: The things I would highly recommend, (a) read our report. It’s generic, it’s just talking about the marketplace and it will give them a good angle on things. Think about your own business, has your own business got these issues, have you considered it, have you taken anything out. Then start looking at your own client bank. Come on one of our workshops. We run CII accredited workshops, which means we don’t talk about our products all the time, we talk about the market. We can teach you how to read a set of accounts, what’s important about articles of association. We go into the research in much more detail to give the lines and the angles that we think are there. But it’s just biting the bullet and going to have a chat with, go and find some clients on your client bank that you’re friendly with that own a business and talk to them and see what their concerns are. Because that’s the best way is to actually go out and talk to businesses about it.
MARTYN PASK: Yes, and I think get the knowledge first, because the knowledge gives you the confidence to go and have those conversations.
RICHARD KATELEY: Exactly right, but don’t wait until you know everything. The number of times I’ve talked to financial advisers, I’m going to go out when I know everything. You’ll never know anything. I learn stuff every single day when I’m out talking to financial advisers, things I’ve never thought about. So if you want until you know everything you’ll never see a client. So a lot of that learning is on the hoof. But as long as you’ve got the basics and the stuff in the back of your head, then it’s a great market.
MARTYN PASK: Brilliant, so where, so in terms of getting hold of this research, and having a look through it, where do they get it from?
RICHARD KATELEY: Go to our website, there’s a dedicated business protection website, legal&general.com/business. Just phone your local MG contact, our details are on the website, download it, have a read of it. And there’s also something else we’ve produced, which is a rough guide to business protection, which is aimed at clients. So advisers can download that. It’s done with association with the Rough Guide people that do holidays and that sort of stuff, but it’s written in really plain English. So it’s aimed at the general public, it’s an e-book they can download, send it to their clients, and let them read it before they go and see them, help them with the conversations.
MARTYN PASK: That’s been really interesting. Thanks very much for your time today.
RICHARD KATELEY: My pleasure, thank you.
MARTYN PASK: Thank you.
PRESENTER: In order to consider the viewing of this video as structured learning, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. By the end of this session you should be able to understand and to describe the current awareness and take-up of business protection products amongst SMEs; the opportunity that exists for advisers to develop in the business protection market; how to develop SME client opportunities; and how adviser businesses’ own business protection requirements differ from those of other SMEs. Please complete the reflective statement to validate your CPD.