CUSTOMER AGREED REMUNERATION - CRA International

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REPORT BY CRA INTERNATIONAL 2.5 Summary of the impact of CAR on the demand for advice In summary, CAR could result in significant changes to the demand for advice and is seen favourably by consumers, improving their perception of the industry and bringing some changes in their behaviour: • Consumers appear to find the concept straightforward to understand and it would remove the confusion regarding advice being free and prompt consumers to ask their adviser what services they are receiving for the advice charge. • Consumers value the transparency of CAR which would increase the degree to which consumers trust the industry and financial advisers in general although this is unlikely to lead non-purchasers to become purchasers. • CAR would make around half of consumers more likely to follow their adviser’s recommendations leading to around 5% of existing customers investing more money and 15% of them visiting their adviser more often. • Among non-purchasers, although 37% agree that CAR would increase the likelihood that they would use an adviser, as they would only become aware of this when using a financial adviser and only 10% had previously stated that they had not used an adviser before because they did not trust them 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. • There is a risk that a group of consumers will take advice but then choose to purchase directly from the provider. This is more likely to occur if it is possible to receive advice for free and to pay a substantially lower price when buying direct. When considering how CAR could be applied in terms of the timing of payments, there are particular difficulties for small investments and regular premium products. In these cases it is not possible to deduct the cost of advice from the initial investment and hence advice may need to be paid for over time. • If the risk of lapse falls predominantly on the customer this could reduce their willingness to seek advice, but if risk falls on the advisers, this may discourage them from serving this part of the market. • If advice is paid for over time, factoring could be used to match intermediary remuneration to their costs. However, clients are suspicious that this provides a way for providers to influence advisers. 24
3.0 3.1 IMPACT ON SUPPLY CUSTOMER AGREED REMUNERATION The previous chapter highlighted that, from the consumers’ perspective, CAR would increase the demand for advice. In this chapter we consider whether CAR would mean that it is economic for advisers and providers to serve this market by examining the implications of CAR for the supply of advice. We start by considering existing intermediary remuneration and how this has been changing. Current intermediary remuneration As is clear from Figure 6, around 22% of intermediary income is through fees, paid directly by the client or through commission offset. This is substantially higher than the 12% that was commonly found in previous surveys. 14 This may be explained by including in our definition both fees paid straight from the client (which is about 12%) and those paid on a commission offset basis. Figure 6 Current composition of remuneration % of remuneration 70% 60% 50% 40% 30% 20% 10% 0% Independent IFA (nonnetwork) National Financial Adviser (IFA) firm Network member IFA All IFAs Fees using commission offset Fees without commission offset Initial commission/related to premium Trail commission/related to FUM Source: CRA International based on survey of 101 intermediaries conducted by ORC International. As well as understanding the way that IFAs are currently paid, it is useful to examine whether this has changed over the last few years (see Figure 7 below). 14 “Study of intermediary remuneration: A report for the Association of British Insurers”, CRA International (previously Charles River Associates), February 2005 25
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