The case for change in the life industry is well documented. CP121 put forward a number of proposals, which ultimately have the potential to create a more efficient framework within which we can address the saving needs of the UK consumer.
As we move forward, however, it is important that unintended consequences are avoided and many feel that one of these could be the demise of the IFA sector due to unworkable remuneration terms. A positive outcome for policymakers, the industry and consumers has to include a vibrant IFA sector.
The defined-payment system proposal is undoubtedly well intentioned. The FSA correctly identified that consumers lack understanding of the advisers' remuneration in the sales process.
Despite previous initiatives to improve disclosure, we are dogged by an underlying suspicion of product and provider bias. This may be perception rather than reality but in the eyes of those who see little good in our industry, perception is reality. The crux of the issue is the misnomer that advice is free. Research demonstrates that the vast majority of consumers have little if any understanding of the relationship between commission paid and the end product they get.
This concern was also voiced in the Sandler consultation. The desire of the regulator to provide greater clarity around the cost of advice is laudable. DPS would force many IFAs to abandon their business model for purely cash-flow considerations, as many do not have sufficient capital within their business to move to a fee-based model overnight.
One alternative proposal worthy of further consideration is the menu approach devised by Aifa and IFA Promotion in conjunction with a number of leading product providers. The ambition of the project was to find a workable alternative to the DPS that would build on best practice in the IFA community to make the cost and value of financial advice more visible to consumers at an early stage in the sales process.
A key driver was to retain the valuable feature of no sale, no fee, that is, retain the ability to be remunerated by commission if appropriate.
In simple terms, the menu would showcase the IFA's proposition. It would tell the consumer at a first meeting: “This is what I will do for you, here is a list of indicative prices for that type of work and these are the ways in which my expertise can be paid for.”
At this stage, neither the adviser nor the consumer would know which, if any, product may be needed but the menu would give the consumer with a “feel” of the cost of the whole process. Importantly, by presenting the “what I will do” with the “what it will cost”, the discussion is moved from one of cost to one of value. The menu would also demonstrate to the consumer that should a product be recommended and commission taken, this would have a material effect on the product charges.
The menu goes further to address the issues of product bias, should any exist, by grouping products together in a way that highlights any cost differences. Thus it could appear on certain advisers' menus that the typical range of commission for a single-premium bond would be 3-5 per cent while for a collective investment, it would be 2-4 per cent.
This differential could be legitimate and the appropriateness of one product over another is clearly a matter for the adviser and their client. However, what this could facilitate from the client is a question over the relative costs of those products and why one is more expensive than the other.
Finally, the menu project has also considered showing market comparisons for advice. Here, the typical commission taken by one IFA firm could be easily compared with the typical range taken by another IFA firm. This mechanism would act as a “proxy for shopping around”.
Clearly, much consultation is needed around the Aifa/ IFAP proposals. Norwich Union will engage in this debate with our business partners to ensure that an equitable solution is found that benefits consumers without creating a new polarised regime based on cash flow, not regulation.
Peter Hales is sales &marketing director at Norwich Union