Factory Gate Pricing
The latest buzz phrase in UK financial services is ‘factory gate pricing’ – meaning a price reflecting the cost of production and prior to distribution and marketing costs being added.
So a non-marketed pension product offered via a nil commission structure can be said to have factory gate pricing, while the same product priced to include adviser commissions is deemed being priced at adviser front-office rates.
The phraseology has triggered the latest periodic review of product distribution and pricing disclosure in UK financial services.
The Financial Services Authority (FSA) is reviewing retail distribution while the Association of British Insurers (ABI), the trade body for the product providers, is talking about a factory gate pricing model called Caris (Customer Agreed Remuneration for Intermediary Services), where customers agree with advisers what they will pay for advice.
So what exactly is going on here? A superficial analysis would suggest that the ABI is anticipating an FSA attempt to break the stranglehold that advisers paid on a commission basis have over retail product distribution and is seeking to position itself accordingly.
But it should be remembered that the commission model has proved extraordinarily resilient for a variety of reasons.
Back in the nineties, disclosure of adviser commission in key feature documents was meant to show customers exactly how much commission they are paying.
This, it was thought, would force commissions down.
However customers were found to be either apathetic or confused by the mass of paperwork, and commissions survived and prospered.
In addition, many customers (similar to other markets globally) prefer commissions to forking out and paying advisers fees directly, which might incur value added tax in any case.
There is a general trend in the UK towards adviser remuneration via upfront fees, though in many cases this is done by offsetting commission against a fee.
It is thought that only a few specialist advisers are purely fee-based, along with the large employee benefit consultancies that serve corporate clients.
Against this backdrop, the FSA and others are aware that commissions may well lead to product bias, churning and other dubious sales practices, to the customer’s detriment.
Hence the desire to align costs with charges by factory gate pricing.
Anyone who has studied A-level economics would be aware that telling providers how to price their products is unlikely to be a workable policy as cross-subsidies, loss-leaders and profit maximisation over product life-cycles all conspire against dogmatic, regulatory-led price controls.
Mind you in saying that, stakeholder pensions with a government price cap have forced prices and commissions down in retail pensions. Could this work across the market?
The perennial challenge of financial services seems to be in persuading providers (and advisers for that matter) to align their interests with those of their customers.
Given the asymmetry of knowledge and infrequency of purchase for products like mortgages and pensions, this is hard to do.
Perhaps a nudge from the regulator over pricing is the right idea after all?
4 Comments on “Factory Gate Pricing”
Post a comment
Martin Benn says:
Factory gate pricing.
stakeholder pensions may have force down prices, but at what cost?
The government price cap on pensions has had an unmitigated bad effected on retail pensions in my view. The problem is not that commission is high, it is now far to low and insufficient to cover cost of advice. The net result is people are no longer sold the concept of pension provision. Of course we all talk the talk, but that’s all we can afford to do unless the client can afford to pay.
Principal based advice will work but will we be around to provide it?
The stark fact is that we are all to busy trying to make our businesses profitable.
If factory gate pricing is going to work for all concerned then the advisers cost, call it commission if like, will need to be factored in. Commission is not a bad word, it’s just wrongly aligned and misinterprets the process. Perhaps it should be described as a client commission agreement with the adviser and reflected across all the providers that the adviser is comparing for a particular client.
This approach could work and would remove any criticism of bias where commission is concerned. It would also allow those who cannot afford advice at present to receive affordable advice without incurring large fees. Of course this won’t work for every situation, but it would allow advisers to be able to afford to enter to pensions arena and slowly redress the disgusting pension imbalance and destruction proudly presided over by the this dreadful government.
The Dragon says:
No – no unbinding fees is hilarious we rolled with laughter at our place – it sounds like a fee for ending consipation…
IFP says:
Oops, “unbindling fees” should be “unbundling”. What this forum needs is an edit facility. Its a standard feature on many php forms, would take little effort to implement. How about it Burningpants?
IFP says:
Sounds like just a “buzz” way of describing what in Australia is known as “unbindling fees”.
I don’t think dictating maximum fees ever works, for many reasons including the ones in this article.
One way to remove commission based bias from product selection however is to force fee structures to be unbundled, soft dollar benefits to be banned or severely restricted and make advisor percent or dollar “dialup” facilities infinitely flexible so any advisor can choose any level of remuneration from any product, with the default if nothing is specified being zero.
Thus the level of advisor remuneration ceases to be a product issue and becomes an advisor issue.
By making advisors nominate their price, rather than just accept a standard commission, advisors will need to come up with and justify their own fee structures rather than claim that their fee is “free” because its paid out of fund manager profits from “standard” fees.
Removing the concept of the “free” commission paid from managers “usual” fees produces essentially the same benefit as many forms of fee for service billing, while retaining the supposed convenience of commissions for advisors and their clients who wish to do business that way.