One of the strange things about living in the country, I have discovered, is that you go to bed much earlier than before. Whereas once upon a time I would have been up most nights watching a late-night movie, I start yawning at 10pm and am usually tucked up in bed by 11 o’clock.
It works the other way around, of course. Farming Today is what wakes me up, which is how I found myself listening the other day to an item about milk farmers and supermarkets.
Apparently, Asda and Tesco are locked into one of these periodic competitions to see how cheap they can make the cost of a certain staple item. By turning it into a loss-leader they hope to attract more customers to the store.
In this particular instance, they have both been selling milk, for which they supposedly pay farmers about 25p a litre, at exactly the same price in their stores. Given that they pay for the cost of bottling, transport and stocking the shelves, they are probably losing at least 3p to 4p a litre.
Still, unlike previous occasions, at least this time the supermarkets are not forcing farmers to bear the cost of their price wars. In the past, some large chains have demanded a subsidy from farmers for selling their milk, effectively forcing them to produce it at a loss. I remember one chain store mouthpiece calling it a “stocking charge”.
I found myself remembering that particular news item last week, after reading in Money Marketing that Aifa is calling for “a sensible debate as to how providers’ distribution costs should be assessed after the RDR”.
The trade body’s policy director Andrew Strange was quoted as saying that “adviser-charging effectively creates free distribution for providers, with the costs passed on to consumers and has called for an industry debate on the issue”.
Strange added: “After 2012, every provider of retail investment products in the UK will benefit from free distribution as, by definition, that is what adviser-charging is.
“There is no other sector where distribution is free for a manufacturer. It is about time we grew up and actually had a sensible debate about who is paying for this because at the moment it is the consumer.”
I am guessing here but, presumably, what he means is that IFAs are effectively shopkeepers. They stock products and sell them on behalf of providers and ought therefore to be paid by those providers for the individual sale. Or have I got it wrong?
Let’s try again. Maybe IFAs are shopkeepers, yes, but rather than being paid by providers for actually selling the product, they ought to be paid for stocking it on their shelves. Is that more accurate?
Either way, it seems IFAs are being told they ought to act how Tesco, Sainsbury’s or Asda behave towards milk farmers and demand that providers pay a fee for the product being sold or stocked.
It strikes me that Strange’s comments are a misconception of what a proper relationship between manufacturer and the retail distributor ought to be.
Contrary to what Aifa says, my understanding of a shopkeeper’s usual relationship with the product is that he or she buys it from a wholesaler or direct from the product provider. The shopkeeper sets a price for that product, taking into account his or her own distribution costs. The customer then buys it and that is how the shopkeeper earns a wage.
Or at least, that’s how my brother-in-law, who makes a living by running several market stalls, describes it to me – and to the best of my knowledge, he doesn’t go to the leather goods manufacturer he buys his products from and demand money simply for sticking the stuff on the stall.
Which is where the factory-gate pricing approach the RDR is trying to introduce after 2012 makes sense.
Under this scenario, the IFA looks at a range of providers’ products, all offering similar benefits to consumers when compared with each other, with a few standing out either for the quality of the product itself, such as performance, or its price. The IFA decides which is appropriate to a consumer’s specific needs and makes a recommendation.
But whereas a normal triangular relationship between shopkeeper, manufacturer and customer would involve an extra charge being added to the wholesale price of the product being sold, in the case of the IFA and provider, he or she is paying nothing for the product. It is not being bought and then sold by the adviser.
Ultimately, what the adviser is doing is maintaining a customer-facing relationship in which the demand for remuneration is based on the quality of the advice given, not the product being sold.
To look at it any other way, as Aifa is trying to do, means that it is – belatedly – trying to maintain the old commission-based relationship for IFAs in a world where that particular method of remuneration is specifically being replaced by fees charged for the quality of advice given.
Now, I might be inclined to give Andrew Strange full marks for trying it on but as a useful way of interpreting the RDR and what it is trying to do, it does not strike me as remotely realistic. Anyway, it’s way past my bedtime…
Nic Cicutti can be contacted at firstname.lastname@example.org