Early commentary on the potential content of the FSA’s retail distribution review has centred on two very emotive subjects – the incentivisation of advisers and potential for changes to commission structures. We believe the review will look much wider and that it creates a real opportunity for advisers, providers and consumer groups to debate and deliver positive change within our industry.
The review is about all forms of distribution, not just the IFA sector, and it will not focus simply on adviser remuneration. The FSA’s other objectives are to consider how to build consumer trust in current models, improve adviser professionalism, reach new customers and improve the financial resilience of distributor firms.
Building consumer trust in current models and adviser professionalism are critical in getting the public more engaged in taking responsibility for their financial futures.
Aegon’s IFA Insights survey found that most advisers believe greater public understanding of their professional status would encourage people to seek more advice. Lack of public trust was cited as a key threat to the future of the industry.
We must use the review as an opportunity to regain ground and make a positive difference to consumer perceptions.
As we move towards more principles-based regulation, firms must be able to show they are following the spirit as well as the letter of regulation. Personal commitment to ethical standards is key, whatever the distribution channel or adviser status, and professional bodies will no doubt continue to help raise standards but a regulatory incentive to do so might be effective.
A recent Aegon survey suggests that a majority of IFAs (79 per cent) would be happy with a regulatory environment where firms that can show high standards of professionalism as well as financial stability receive a regulatory dividend from the FSA.
The review might consider ways that adviser firms can improve their capital position and so their ability to expand or respond to events. Many distributors are not as well capitalised as they might want to be.
We believe many are keen to reduce their reliance on up-front commission and would like to increase fee-based activity. Our survey suggests that while almost half of advisers (48 per cent) would like to move to a fee-based structure, their business relies on regular commission payments.
A move to fees will not happen overnight and the review again offers the chance to explore evolutionary as opposed to revolutionary change. The role and funding of compensation schemes may also be considered under this banner.
Reaching new customers is one of the most fundamental issues facing the long-term savings industry. Those who seek and receive professional advice from high-quality advisers can be very well served but a growing proportion of people are not benefiting from having access to advice.
Despite positive new business figures, industry analysts have highlighted the lack of true new savings. The review should involve all sides in looking for improvements across all current distribution models as well as explore new ways to deliver advice to the broader population.
It is clear that the Government is keen to see a greater number of people making sufficient savings to meet their retirement needs. Personal accounts are one example of this strategy. Another is to develop a new form of generic financial advice sitting outside current FSA regulation.
Aegon firmly supports the role some form of generic financial advice can play in helping people understand their product and advice needs, alongside vibrant regulated advice channels.
Equally, we recognise that other distribution approaches should be considered. This may involve different levels of advice to meet different consumer needs and, if so, it will be vital that consumers can identify clearly what advice service they are receiving and can be confident that the adviser is appropriately qualified to deliver it well.
Finally, there is factory gate pricing. This is not a new concept and many providers offer versions of it for some of their range. It involves the provider setting a price for the product excluding the costs of the services provided by advisers. The adviser agrees with the client what advisory services are required and how much these will cost. Unlike a fee model, where the client pays this as a separate lump sum, the advice cost is instead converted into additional product charges.
The benefits of this approach include improved transparency. The advice charges are agreed explicitly between adviser and customer, with no provider involvement and so no question of provider bias. In addition, customers are not faced with a separate fee. Payment can be conditional on actually buying a product and/or paid over time.
There are many questions still to answer about factory gate pricing. How well is it working at present? What products should be covered? Does it make sense across all distribution channels? Will indemnity commission be allowed or will factoring take its place? Should there be limits on the level of advice charges? How will consumers view it? Should the regulator encourage or even compel a move towards this model?
We hope the discussion paper will raise some of these questions. Advisers and providers have a valuable opportunity to think creatively about how we can best meet the needs of current and potential customers.