When you have worked in this industry for even just a short time you soon realise that the only constant is change. Each new initiative or piece of regulation is accompanied by a further change being required in the processes we use to do business on a daily basis.
Just take the last year as an example – we have had treating customers fairly, the retail distribution review and the arrival of factory gate pricing, to name but a few, and I doubt that 12 months ago, many of us were focused much beyond TCF.
We could speculate about the outcome of the RDR but we are seeing some real change being implemented across the industry as a result of the wider introduction of factory gate pricing for products.
It represents a major challenge for advisers and providers alike as the daily interactions, which end in a client sale, bring about all manner of change.
I could talk at length about how, as a provider of a suite of FGP products and a leading supporter of the concept, Prudential has had to change – but chances are that you would be asleep by the end of the paragraph – after all, the challenges faced by Prudential and other product providers are probably not your greatest area of concern, and nor should they be.
That said, however, the challenges that distributors of our and other providers’ FGP-based products face are very visible to us. That is why a collegiate approach to supporting advisers is something that we are keen to adopt.
Across pensions and bonds, we have seen a significant increase in the number of providers bringing factory-gatepriced products to market in the last 18 months. The profile of such products has increased in prominence, not least due to the RDR but also because they are more widely available and are now very much being considered by advisers as a viable way to write business.
The concept of FGP or consumer-agreed remuneration is not new but until now there has not been the collective will to write business on this basis. So what has changed?
The retail distribution review focused the debate on CAR, linked to factory gate pricing. The aim was to identify and separate the cost of the product and the cost of advice.
Previously, the cost and charges were applied without being individually identifiable. This, in turn, fuelled the debate over transparency, product bias and undue influence or incentives being offered by providers.
At the same time, we have seen more of our distributor partners/advisers looking at the cost to them of writing business and reviewing the value of their client banks over the long term.
It is this fundamental shift, albeit initially at the fringes but now more mainstream, that is also helping with the means by which advisers can start to consider FGP-based products.
By being able to pinpoint the cost of advice and understand the revenue stream associated with each piece of business, advisers can see the benefit of these remuneration streams on their bottom line.
Perhaps the hardest part of the transition from conventional providerfunded commission-based products to advising on customer-agreedremunerated products is the change required to the sales process. Getting the softer skills right is crucial.
Putting a charge against the service level provided is not easy. To get such conversations right requires a level of re-engineering to the sales process, training and new levels of understanding on behalf of the client.
The extent of change will therefore depend initially on how far an adviser’s business is service rather than transactional-based.
The actual impact of FGP in terms of market adoption will be dependent on a number of factors yet to play out, including:
• The extent to which FGP is a bottom-line requirement for the various service led adviser types within the FSA RDR.
• How the RDR debate over the independent label pans out. Aifa has suggested only two options worth considering, the first for professional financial planners and general financial advisers who select from whole of market and who are remunerated by fees or CAR/FGP.
The second are those who meet this criteria and allow customers to remunerate via traditional commission if the client requests it.
Either way, FGP would be clearly linked to independent status
• The extent to which any regulatory dividend is derived from advisers using FGP.
• The extent to which other providers adopt FGP.
• Which other non FGP product structures continue to be available. More noises than ever before are coming from Providers about the lifecycle of non-FGP-based products.
For advisers whose client proposition is a service-led one, FGP is little more than a formalisation of existing practice whereby adviser and customer agree customer service levels and adviser remuneration in advance of any product sale. For these advisers, FGP offers enhanced flexibility around passive, recurrent remuneration that, in turn, will help move adviser businesses from lifestyle businesses supporting adviser income towards that which supports greater embedded value and exit planning in the business.
For others – and we will call them here, the “fee or free” adviser – whose proposition is essentially one of product selection and sale – it may prove challenging as product charges are unbundled and an explicit link between charges and commission is created.
As regulatory pressures drive through change, providers will have to explore a variety of ways to support such advisers on the transition journey.
For these reasons, as the market transitions, Prudential will, for example, continue to offer a commission-based unit-linked bond in parallel with a factory-gate-priced version of the product.
When a combination of short and longer-term remuneration options are used in this way, it can help to address industry concern surrounding sustainability, through increasing the capital value of adviser firms as well as providing customers with a greater understanding of what services they are paying for.
The table below summarises the benefits, as we see them, of factory gate pricing for consumers, intermediaries and providers
So what of the future? We believe that advisers adopting factory-gate pricing now will benefit from first-mover advantage, such as those in the long-term tax and trust planning market who can build a closer relationship with clients and develop their businesses with greater embedded value and generate ongoing revenue.
We are committed to supporting advisers as they embark on this journey.
Benefits of factory gate pricing
• Reduces risk of products designed as medium to long-term investment products being used in the short term
•Leads to greater transparency in the relationship between consumers and intermediaries, enhancing trust in long term financial products
• Gives transparency on wholesale price of products in a clear way
• Helps reduce persistency risk of writing new business
• Products are now more conducive to long term relationships due to wholesale nature of client’s base AMC
• Transparent cost of advice
• More clarity and emphasis on value added by intermediary
• Overcomes perception problem that ABI believes consumers have with the current model
•More conducive to better long term relationship with intermediary, allowing trust to build up
• Base AMCs are not as high due to wholesale nature of the product• No early cash-in charges as standard
• Simpler products that are easier to understand
• Power in the intermediary’s hands, enabling more open discussion and more transparency in the cost of advice
• Flexibility to tailor remuneration to the needs of individual clients, rather than manipulating existing arrangement dictated by product provider
• By having open discussion with clients, intermediaries can promote their role and demonstrate the added value of service they provide – helping to win trust of increasingly discerning consumers
• Meets regulatory requirements – factory gate-priced products are consistent with FSA principles of treating customers fairly