CUSTOMER AGREED REMUNERATION - CRA International

REPORT BY CRA INTERNATIONAL
2.3.1
2.4
Among non-purchasers, 37% agree that CAR would increase the likelihood that they
would use an adviser. In practice, however, these individuals would only learn about CAR
after they have visited an adviser or indirectly through word of mouth. In addition, only
10% of non-purchasers had not used an adviser before because they did not trust them.
For this reason we do not assume that there will be an increase in demand from non-
purchasers in the short-term, although it may increase demand in the medium-term.
Potential switch to direct purchase
If CAR is successful it will result in consumers understanding that advice is not free, but
rather that advice has implications for the charges they pay. There is, therefore, a risk
that a group of consumers will take advice but then choose to purchase directly from the
provider. Indeed, 47% of purchasers agree that they would be more likely to take advice
and then buy the product direct from the provider. However, evidence from focus groups
indicated a recognition that there would be a time cost involved in doing this and although
individuals believed others might take this course of action, those who trusted their
adviser would not follow this approach. Furthermore, this course of action is already open
to consumers at present and many consumers still prefer to use their adviser.
In reality, a switch to direct is more likely to occur if it is possible to receive advice for
free and to pay a substantially lower price when buying direct. If this becomes a
significant trend it is likely that intermediaries would change the way they charge for
advice to counter such a challenge.
Paying for initial advice over time
How much the consumer will have to pay upfront will have a significant impact on the
actual level of demand. Evidence from interviews with intermediaries indicates that many
consumers are reluctant to pay a significant cost for advice on an upfront basis. This is
consistent with the negative reaction to fees that was found in the focus groups.
Where consumers are making small investments or are using regular premium products,
it would not be possible to deduct the cost of advice from the initial investment without
creating a “debt” which would be unattractive for many consumers. Instead, consumers
prefer to pay for advice over time. However, if payments for initial advice occur over
time, this raises two issues:
• What happens if the customer lapses?
• Can providers pay the adviser in advance of the money being collected from the
Lapse
customer?
Under current commission based advice, if customers lapse their product during the early
years, then providers will typically claw-back some of the indemnity commission from the
adviser and hence the adviser suffers from lapse. It is less clear what the impacts would
be under CAR where there is mixed evidence:
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