One of the biggest changes to the financial services marketplace will be the introduction of the FSA menu of commission charges in January 2005, setting out advice costs and how they compare with the market average – the industry figure calculated by the FSA, against which advice costs will be benchmarked.
The menu is designed to help consumers choose between different suppliers of financial products as well as increase competition in the financial services marketplace.
However, there are a number of areas for potential confusion that advisers need to be aware of and to consider during their preparation for the new regime.
The main objective of the menu is to improve the transparency of commission (and commission-related) charges for advice by advisers who do not offer a fee-based option.
This objective is in line with the FSA's mission to improve the reputation of the financial services industry and to help improve the understanding of financial products by consumers.
However, based on our analysis of the current menu structure, together with our res-earch of the market, we predict that advisers will face a number of challenges when offering more transparent charging structures to their customers.
The first issue is that while the menu is designed to help consumers make informed choices, it will nevertheless introduce an additional stage into the sales process.
Advisers will need to explain the document to consumers at the outset of any discussion and must be prepared for customers to take the document away to study it further – and compare it with documents from other advisers – before making a final choice.
This will be complicated by the fact that the menu has been designed for a relatively sophisticated audience who are aware that different commission shapes exist and can make the appropriate comparisons. Some charges will be expressed as a front-loaded charge and some may be shown as an annual fee or any variety of combinations.
As market studies have already shown, there is a lack of understanding by some consumers of how percentage values work, let alone how to choose between products that have different charging structures.
An added complication will be the fact that for many consumers this will be the first time that they have seen charges for advice explicitly expressed, whether as a percentage or as a financial value. Advisers will need to spend time explaining the rationale behind the menu and what it means for them.
As part of this process, they will need to explain why advice for some products, for example, whole of life, is more expensive than for others, such as collective investments and, in particular, why their own charges may be higher for some product groupings compared with the market average.
As consumers become more used to the concept of the menu, these initial challenges are likely to disappear and replaced by other issues. The most pressing of these is likely to be the trend of downward pressure on the market average for specific products.
Market-average figures will force advisers to articulate their proposition in the marketplace. A firm that has defined its brand around high-value expertise may feel comfortable with above marketaverage charges, especially if it is regarded as a specialist in a particular area and can demonstrate its proposition to customers.
However, for some advisers, the pressure on reducing their charges may deter them from competing for business in particular product areas, potentially reducing envisaged competition – and subsequent benefits to the consumer – across the industry as a whole.
Whatever advisers decide to do, they need to think now about how they would like to be positioned in the near future, which will have implications for their charging structure.
An adviser's advice and service proposition will be a key differentiator, enabling the adviser to justify their charges.
Key elements of an adviser's proposition are likely to include: access to advice tools to help the client in risk profiling and fund selection, streamlined business processes, the use of automation to speed up the transaction process, easy access to a wide variety of funds and ongoing review of a customer's total portfolio.
Another consideration for advisers is how they will work with product providers to achieve special offers and discounts for their customers.
As market-average charges find their level and as consumers become more familiar with the process of comparing charges between adv- isers, advisers may pass on price discounts for particular products to consumers. Admin systems for adviser and provider will need the adaptability to cater for flexible remuneration options.
Despite that, we believe it unlikely that consumers will have the confidence, at the outset of the new menu-driven marketplace, to haggle over charges and ask outright for discounts. This is not least because negotiating is not something with which most British consumers are comfortable.
However, we think this will change as the concept of the menu becomes more familiar – and consumers understand that they can negotiate over fees for advice just as they negotiate with firms of estate agents or motor dealers.
Advisers will need to be in a position where they can flex their charging structure according to market demand and their market positioning.
There is also an opportunity for advisers to take a clear lead on helping to educate consumers on the value of advice and in particular the merits of their own advice proposition.
The demand for professional advisory services is likely to increase and advisers who deliver demonstrable value and expertise to their clients, can look forward to a bright and prosperous future. Those who embrace the menu, recognise the issues and take appropriate action today will be in the best position for the changes that lie ahead.