There’s a worrying possibility that the FSA is about to kill off independent financial advice in the UK for all but the wealthy. I do hope I’m wrong.
It’s just confirmed plans of its Retail Distribution Review which, in a nutshell, means from 2012 Independent Financial Advisers will have to charge a fee rather than simply take their cash from commission.
Its valiant aim is to get rid of ‘commission bias’, where some IFAs are more prone to recommend products that give them higher commission.
Therefore, it may surprise you that I’m worried it’s a bad move, especially as most personal finance journalists tend to be in favour. I should note, this isn’t a core subject for me, so I’ve only read summaries of the proposals rather than word for word, but the gist is plain…
Setting the scene.
For those who don’t know, let me explain how it already works. This is taken from my financial advice guide, so you’ll be unsurprised to see the viewpoint I took when writing that starts to draw you along the path of this argument.
IFAs are… “paid in two ways, by fees or commission, and by law they are required to give you the option of either. While most journalists are very pro-fees and berate commission-based advisers, I believe both systems have merits.
- Fees. Here they charge a flat hourly fee for their advice. Standard fees range from £75 to £250 per hour depending on where you live and what kind of advice you need. Make sure you ask in advance and compare costs.
The great advantage of fees-based advice is there’s less incentive for advisers to bias their advice according to how much commission they’ll make, as they should pay any commission earned back to you – either in the form of a rebate or a boost to any plan (always ask and check this is happening).
Plus, if you’re making a large investment or pension, then you’re definitely better off paying a fixed fee rather than commission, as commission increases with the size of the investment.
- Commission. Advisers paid commission may seem to be giving advice for free, but over the long run they tend to make more money this way than by charging a fee upfront. Some plans can be extremely profitable and will make advisers a large amount of money. As an example, a typical upfront commission paid on a £30 a month level term life assurance policy for 25 years would be £600.
The proof that commission impacts advice is that companies deliberately market increased commission rates to IFAs. If advice was never biased, then the rate of commission wouldn’t make any difference, yet product providers know that if they up the commission rate, they’re more frequently recommended.
However, the commission route still has its merits. While there will be some bias, the legal obligation to give good advice means advisers tend to tweak at the fringes rather than give downright poor information. And the big advantage is that as you won’t need to stump up the cash each time, you’ll be less scared to seek help when needed; thus will continue to get retained advice. “
What’s the problem?
I’m not convinced most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash.
The advent of fee-only is likely to mean fewer people seeking advice and those that do may go for it less often to keep the fee down.
While in principle I support the FSA’s stance, in practice, I think it could be a nightmare from which we may not recover. I think I prefer the idea of people not getting perfect advice due to slight commission bias, than not getting advice at all.
Of course, it is also talking about systems whereby the commission is recouped up to a set fee, which is better – but still psychologically there is the danger here that people don’t want to pay an hourly fee in any system – it just looks too expensive.
The Real Nail in the Coffin.
What I find most galling though is that bank-based advisers – those primarily responsible for PPI misselling, endowment misselling, investment misselling and generally poor advice all round are still to be allowed to be remunerated based on the number of sales.
So bank advice, which as they can only look at a limited number of products, will become known as “restricted advice” (though it’s often far closer to sales tactics than advice) will be free and commission remunerated; yet you’re going to have to pay a fee to get a cross-market comparison. This seems to me a bias in totally the wrong direction.