Historically, the market has been funded by initial commission. Much as the market and the FSA believes that the consumer does not really understand the true cost of commission, the fact remains that it is a relatively cheap method of payment.
In life contracts, the manufacturer enjoys tax relief against this cost and this has usually been passed to the consumer. In addition, EEV accounting standards allow the amortisation of this cost, resulting in the consumer not paying the full cost of provision.
Commission is a loan against a policy and high attrition levels mean these loans are not being repaid, hence the challenge for the manufacturer, but is its removal the answer?
Consider the current alternative for a moment. Insured products normally cost around 20bps a year, multi-manager funds a further 200-250bps and remuneration anywhere between 50-100bps. Add this together and the full cost of provision of the consumer solution is somewhere in the range of 270-370bps.
In a market of low inflation and low interest rates, our equity risk expectation must also be low and if this is only 4 per cent a year, we are asking the consumer to accept all the equity risk for around 1 per cent a year incremental growth. Surely, this solution is as inefficient as the old way?
Add this issue to concerns that many consumers just need transactional solutions and maybe factory gate pricing is not the answer.
But we cannot return to high distribution cost and confused consumers or the retail distribution review will have been a waste of time. We need solutions that support the intent of these changes, especially anything that lowers the cost of execution.
Simple Sipps normally have more value than insured pensions for bigger amounts, passive funds have lower costs than active ones and instead of overpriced multi-manager funds, seek multi-asset-class solutions that reside in one fund house. General investment accounts are usually more tax-efficient and lower cost than bond wrappers and if there is no requirement for high initial payments, usually offer the same remuneration structure for the adviser.
The result of these pressure points seems to be having effect. Active management of passive instruments appears to be on most fund houses’ agenda and manufacturers are reinventing themselves and using their balance sheets for the purposes of consumer protection through fund guarantee structures.
The structural issues we face are challenging but advisers can take comfort in the fact that the wider threat is to manufacturers and fund managers who have for many years placed the responsibility of high cost on advisers.
Alan Easter is head of strategy and distribution at Money Portal