CUSTOMER AGREED REMUNERATION - CRA International

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REPORT BY CRA INTERNATIONAL advisers. Our research found that 5% of existing customers would invest more money and 15% would visit their adviser more often. Among non-purchasers (those who have not purchased financial products through a financial adviser), 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. 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. There is, however, a risk that the greater transparency will lead a group of consumers to take advice but then choose to purchase directly from the provider. Intermediaries may need to make changes to the way they charge for advice to counter such challenges. Other consumers believe that providers will find ways to continue to influence their intermediary, for example by offering factoring arrangements. What would be the impact of CAR on the supply of advice? One of the issues regarding the introduction of CAR is that it could reduce the potential for cross-subsidies between different consumers if the greater transparency leads clients to negotiate. This could result in consumers with a smaller amount to invest finding it more difficult to access advice as supply is withdrawn from this segment. There are a number of reasons to be slightly sceptical regarding the size of the effect of cross-subsidies. Firstly, advisers could already choose not to service these consumers today and this would increase their profitability. Secondly, price discrimination already occurs through active consumers requesting rebates, although CAR will encourage a further move in this direction. Thirdly, advisers already differentiate between clients and consumers, with clients seen as being in a long-term relationship (that may not be economic in the short-term but will be over the longer term). However, CAR is unlikely to reverse the trend for IFAs to serve fewer lower value clients although this may be partly offset by clients being more confident in the industry and less resistant to purchasing in the first place. CAR could influence the role of nationals, networks and service providers, so that they focus on using their bargaining power to negotiate better terms on product pricing for the consumer and use this to market their services to consumers. Which product and intermediaries should be included within the CAR model? Without additional encouragement, the use of CAR will grow but will only be used in certain market niches. In particular, it is unlikely that there will be significant use of CAR by nationals and networks or tied advisers. Although providers will increasingly 4
CUSTOMER AGREED REMUNERATION offer products of this type, they will remain focused on single premium investment products. In order to determine where CAR could bring benefits there are a number of important issues to take into account. It is clear from the evidence from consumers that given the complexities of the retail financial services market, consumers would favour a simple system applied to all products and all types of adviser. However, there are strong arguments indicating that CAR is more appropriate in some parts of the market than in others, including: • The mechanics of applying CAR: the application of the CAR model for single premium products is simpler than regular premium products. • Evidence regarding provider bias: Previous research by CRA found that provider bias is most problematic for single premium products rather than regular premium products. • Evidence regarding product bias: Previous research by CRA found that product bias is more problematic for the IFA channel than for the tied channel. In retail investment products, the great majority of the value of investments are structured as single premiums but, given the potential for substitution between regular and single premiums, our evidence supports the application of CAR to all retail investment products irrespective of the premium type. The difficulty of applying CAR to small regular premium products without factoring, however, suggests that caution is required regarding the potential application to protection products. Issues regarding the application to different types of intermediary appear more straightforward. One of the advantages of CAR is that consumers will be made aware that the cost of advice has implications for the price of the overall product i.e. that advice is not free. Despite negotiation over the cost of advice being unlikely in the short run in any channel, in most parts of the tied channel it is difficult for consumers to distinguish between the provider and the adviser – especially in the banking channel – and hence it may never be possible for the consumer to negotiate with the adviser. 1 Furthermore, the incentives faced by advisers in the tied channel are not directly related to the cost of advice that is, or would be, disclosed. Hence CAR would not, in itself, remove the potential for product bias. Finally, it is unclear that tied providers can differentiate between consumers who want ongoing advice and those who do not. Thus there is reason to be sceptical that CAR can bring clarity to the role of, and payment for, ongoing advice in the tied channel. Our research also found differences in consumer perception regarding tied advisers associated to banks and insurance salesforces. When asked, many consumers see advisers within banks as performing a sales function and are less concerned regarding how they are remunerated. Consumers are less likely to suggest the application of CAR to the insurance tied channel compared to the bank tied channel. 1 Consumers did not identify as a distinct group advisers operating as a separate business with a single tie. These advisers may face remuneration structures similar to IFAs, but evidence regarding consumer reaction to these advisers is not available and hence strong conclusions about them can not be drawn. 5
Page 1 and 2: ABI RESEARCH PAPER 6 CUSTOMER AGREE
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CUSTOMER AGREED REMUNERATION - CRA International

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