On the one hand, I have heard advisers describe it very much like commission that is agreed with a client before a sale takes place. How this is different from how advisers operate now is unclear. Don’t we already agree commission with the client?
On the other hand, I hear that CAR will herald the death of advisers as customers will not pay fees. “Why can’t we have the old maximum commission agreement back?” they ask.
So which is it? Actually, it is neither and yet both, simultaneously. A neat trick or nonsense? I think the terminology is partly to blame. CAR is neither helpful, nor very self-explanatory. It implies that there is another form of adviser payment that customers do not agree. This is not really true even of commission and certainly not helpful if we then have to call any alternative customer-disagreed remuneration. Implicitly, customers do agree although I suspect that sometimes they just do not understand that they are paying the bill.
To be more accurate, we are talking about transparent adviser remuneration or, better still, transparent fees or charges because they are words even I understand. This does not help much as consumers do not want to pay transparent fees, do they?
The FSA has partially clarified things by referring in various subsequent disclosure papers to contingent fees and in its RDR interim report to remuneration determined without provider input. What it means by this is not clearly defined but I suspect a contingent fee is a charge made for the advice (a fee) but contingent on a product being taken up. Unlike commission, which is also contingent on a product but varies by product or provider, a contingent fee should remain the same regardless of the product or provider recommended. It should also be explicitly taken from the product and not hidden among other charges, otherwise it will not be transparent.
For example, in the commission world, some advisers equalise the commission they take from bonds, mutual funds, self-invested personal pensions and so on. Let us say they take 4 per cent initial plus 0.5 per cent trail regardless of the product or provider.
What they are really doing is setting a contingent fee for their advice but often they and the provider/s present this as commission.
If they just changed the emphasis on how such a fee was presented, disclosing before any product recommendation that their advice fee was 4 per cent of any initial investment plus a 0.5 per cent each year, they would have effectively shifted their business model to CAR.
All it needs is for the provider to separate out how this advice charge is taken in a transparent way. It is all in the presentation.
Why don’t we just have a maximum commission agreement and make things simpler? Apart from the Office of Fair Trading not liking such arrangements, I am not convinced that as an adviser, I would like it much either. I want to be able to charge what my service is worth to my clients and not be limited by a cosy agreement between providers. If my service is better than the adviser down the road, why shouldn’t I be able to charge more?
This is the crux of CAR, or contingent fees, and why I believe that quality advisers and firms should be jumping up and down to move to this new model. It has none of the drawbacks of the chequebook moment – effectively looking like a very transparent commission charge – and all of the advantages of being able to set your own advice fees.
Of course, as it evolves and more firms adopt it, those advice charges may come under competitive pressure from other local advisers, so firms need to be pretty switched on and ensure their advice service is valued and trusted by their clients. But it is, isn’t it? If it is not, surely thinking about this is a good thing for our industry?
CAR has another advantage, too. As all providers will have to shift to clean, factory gate-style pricing to serve the adviser market, comparing providers will become much simpler. Bigger firms may be able to negotiate a discount on the admin charges of a product, instead of higher commission, but as a small adviser I will be able to keep my costs to a minimum and undercut them on my advice charges to compensate for this.
The economic arguments for CAR are pretty clear-cut. Consumers will understand what they are paying for and can negotiate or shop around with confidence. Providers will focus on product proposition, service and consumer price, instead of commission. Advisers will focus on advising and the quality of their own service offering to their customers. Could we be heading towards a market economy instead of what has been referred to as an inverted economy where price complexity and consumer disinterest have left firms to battle it out through commission?
The last defence of many commission-based advisers has been to assert that there is nothing wrong with the way they do business. They have few complaints and customers prefer the advice to be “free”. I do not disagree. In fact, I think commission will be around for a very long time to come. My own view is that IFAs will not be using it. If they want to differentiate themselves from the bancassurers and tied salesforces, advisers will need to hang their hat on something more meaningful than being whole of market. A commission-based whole of market adviser is really a broker in normal language. If the emphasis on your business card is on the advice, don’t be scared of making the customer pay for it.
A final thought. If it is not CAR, what do we call it? I think I would be using advice fee or advice charge. This has some potential VAT implications but if you can demonstrate that your predominant service is intermediation, acting as an intermediary, which you surely can if you are paid through a product you have recommended, your advice services will remain exempt.