Factory-gate pricing 'brings advice transparency'

A move to factory-gate pricing could answer the Financial Services Authority's concerns about the transparency and sustainability of financial advice, suggests the ABI.

The FSA has raised concerns about the retail distribution model on several occasions, most notably in November last year when Bruce Robson, manager of the asset management sector, described it as being unreliable, untrustworthy and failing to establish long-term relationships.

Alex Roy, assistant director of distribution reform for the ABI, believes the fact providers are paying advisers to sell products has created a “significant perception problem” on the part of consumers and a factory-gate pricing model could help to address this problem.

Factory-gate pricing is already used by some providers and intermediaries in the market, as the provider sets a price for their product and the adviser then discusses with their client what they will charge for the advice.

The cost of the advice can be paid by fee or included as an addition to the cost of the product, but in both circumstances the consumer explicitly agrees how much they are willing to pay for the advice.

Roy believes factory-gate pricing puts more power in the adviser’s hands, enables them to have a more open discussion with their clients and makes them more transparent about the cost of advice.

He says: “Consumers are unwilling to pay fees because they are unaware of advisers’ services and their value. By having a discussion with the client, the adviser will be able to promote their role and demonstrate the value of the service they are giving.”

Roy also thinks the model would have benefits for providers – once they have spent money altering their systems – because it would allow them to focus on the products they provide and work out what the manufacturing cost is.

But he adds there are issues still to be considered, such as whether the model could apply to all people and all firms and how the costs of the product and advice would be separated.

“The industry would need time to push the model in and explain how it works, but for the IFA there is an opportunity to sell the services they are providing and demonstrate the value they add,” says Roy.

Have Your Say: David Kirkpatrick of David Kirkpatrick Associates in Ballyclare, says:

The Thinc/AXA rationalization has just made me realize that in the 20 years since I’ve set up my little IFA business we’ve had:

FIMBRA, PIA, FSA, insurers buying estate agencies, insurers selling estate agencies, insurers starting direct sales forces, insurers closing direct sales forces, insurers selling direct sales forces, insurers closing branches, insurers outsourcing claims handing to Asia, insurers closing claims handling centres in Asia, insurers merging, insurers refocusing, and still my little three person practice still keeps on going dealing with the same clients we were dealing with 20 years ago.

And Alex Roy from the ABI thinks the current retail model is unsustainable? Perhaps the insurers, regulators et al should put their own houses in order before turning their attention towards IFA’s, the only constant throughout that period.

Have your say: Alan Lakey, partner at Highclere Financial Services, says:

I remain terrified by the potential implications of the ‘initiatives’ being parleyed by the various interested parties within the industry.

It is a fact that well-meaning people have combined to decimate the advice options in recent years. We have had the nonsense that is de-polarisation, where no benefits have flowed for the consumer. The only winners being bancassurers and those advisers who have adopted multi-tied practices.

We still suffer from the implementation of Stakeholder Pensions which were designed to appeal to the lower paid but due to a design flaw where the cost of distribution was removed they are not ‘sold’ in any great quantity.

Now we have ‘experts’ who know less about the industry than I do about deep-sea fishing and they are intent on changing the remuneration model to suit their idealistic purposes.

The end result will be less people insured, less people in pension schemes, less people saving within ISAs and less people receiving rounded financial advice.

Is this a price worth paying for ‘transparency'? I think not.

If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7034 2680 or email emily.perryman@incisivemedia.com.