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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


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. The problem with the change in the method of distribution as a result of RDR is that will product providers who have for years been paying commission, then reduce their charges as a result and what sort of competitive pressure will their be after RDR for them to do so?

    Will, for example, premiums on protection policies stay at a similar level to what they were when commission was paid or will they reduce?

    How also will premiums be calculated on a say a level term insurance policy if it has been agreed with the client you will take the fee from the product?

    I thnk AIFA have a point though and Nic also makes some valid points. What concerns me with all of this is how will their be any sensible competition between IFA’s and product providers given the change in remuneration method?

    I can see Banks and large IFA’s will have some clout with providers as we are already seeing with some such as Aviva making plans with the Banks but will consumers get better value or will product providers simply increase their profits?

    My guess is the latter in which case their shares may start looking an attractive buy now!

  2. no one listens to Aifa any more so what Mr Strange says is irrelevant.

  3. The one piece of misunderstanding, that undermines the whole of the RDR proposition, is that IFAs perform two tasks. Sometimes they perform these tasks separately and sometimes together.

    Sometimes I provide advice, and by advice I mean that I take a holistic approach and ensure that all the pieces fit together.

    Sometimes I arrange for the purchase of a product. This is a specific product designed to perform a specific task, such a repay a mortgage on premature death.

    Sometimes, as result of the holistic advice the client will purchase a product.

    So sometimes we are pure advisers, sometimes we sell product and sometimes we sell product as a result of full programme of advice.

    These are different tasks.

    If holistic advice is not involved and it is a relatively simple product transaction then we are like shopkeepers and we need a mark up on the retail price in order to survive (or a fee if it is feasible and/or affordable).

    Now, before Nic or somebody else suggests that I am advocating product flogging with no thought to the product, this is not what I mean.

    There are verious aspects to the advice process and some are relatively simple and others extremely complex.

    Most clients will not agree a fee for a ‘simple’ product recommendation but will be content to have the price of the consultation built into the product.

    This is not new, virtually all retail industries operate this way. We are no different and shouldn’t be treated thus.

  4. For once I agree with Nic. The costs of advice and implementation should not be in any way influenced by the product provider. And anyway, one way or another, the customer pays. How can it be otherwise? Commission doesn’t come from some unconnected benevolent fund, it’s recouped by way of the charges built int the product.

    Charging an explicit amount for services rendered which (if a separate fee is declined) is deductible from the sum invested in the product may be more brutally stark than being paid commission, but it’s also a great deal simpler and clearer for all concerned.

    I don’t see what the problem is, and many of advisers have been operating more or less on this basis for several years anyway.

    Commission on protection products is set to remain, though removal of the indemnity option may be difficult for some. From my own experience, switching to non-indemnity isn’t nearly as hard as many people seem to think.

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