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Thameside director Tom Kean says commission is nothing to be ashamed of.
IFA view: Fee flaws
In the debate over commission v fees, I would say look at some of the Ponzi schemes that have hit the headlines. I bet they charged a fee.
One common element that resonates around these is their up-market nature and we all know that people love a bit of exclusivity.
Our industry loves to ignore a white elephant in the corner. Take reduction in yield and what it means for the consumer. We like to think that an RIY of 1.5 per cent is the cost to the consumer. But a 1.5 per cent RIY actually translates to a huge proportion of the fund years down the line.
Look at a quote and as much as a third can be eaten up in charges over the life of a plan, that, somewhat unfairly, the consumer so often puts down to commission and nothing else.
Another clanger that seems to get ignored is the practice of banks and supermarkets to describe their commission-free currency exchanges. How can they say it is commission-free when they have gaping bid/offer spreads? It is commission, plain as the nose on your face.
Retail financial services seems hellbent on self-destruction by mutating the word commission into fees. Since when was an annual 0.5 per cent fund-based commission suddenly a fee? It is easy to see this happening all over the place on company websites, for example. Why can’t people just call it what it is?
I believe that a fee, by any reasonable person’s definition, is a time-based remuneration paid to an adviser for his or her efforts. A percentage of an investment is commission.
If this is not the case, I am happy to be corrected and it is then incumbent upon the FSA to clarify for all our sakes what on earth a fee is. Quite why some people seem ashamed to call their income as commission is beyond me.
Of course, the motivation of all of this is the RDR and the drive to fees. I have said before, and I will say it again - it is just as easy to be a crook charging fees as it is to be a crook charging commission.
The drive to fees is one of those fatally flawed ideas that flies in the face of reasoned and sensible thinking.
Tom Kean is director of Thameside
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Readers' comments (3)
Anonymous | 8 Jan 2010 5:01 pm
A fatally flawed idea from a totally discredited regulater.
It's the hypocrisy from the Tories that still amazes me. They say that the FSA is'nt fit for purpose.....
But....their half-baked RDR is?
If the FSA is'nt fit for purpose, then neither is RDR.
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Martin O'Connell | 8 Jan 2010 9:03 pm
I think the point is being missed here and that the analogies being used are all wrong.
The point is that the FSA wants advisers to be paid for the advice given not the product sold. If that means getting rid of the word commission, actually that could be a good thing - especially in Tom's first example. If 1.5% RIY takes a third of a fund over a number of years, consumers can only blame that on commission if commission exists. This is exactly the kind of misunderstanding by the consumer that the FSA wants to eradicate.
It's the same in my mind with the currency example - of course it's a scam, but let them get on with it. How we can get upset by a dodgy travel agent - or bank - flogging a few iffy Euros on the side and compare that to professional financial advice is a mystery to me.
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SIMON MANSELL | 8 Jan 2010 9:20 pm
THE COMMISSION MIS-SELLING MYTH
There seems to be a conventional wisdom" shared by the chattering classes who unfortunately often repeat but but never challenge this wisdom. The problem being: "A lie told often enough becomes truth",
and certainly this lie has found its way into the popular mind set of regulatory policy as evidenced in the FSA Retail Distribution Review. Dr Huertas, Director Wholesale Firms Division FSA summed this misguided belief up when he stated: 'Commission-based distribution arrangements tend to lead to conflicts of interest and may result in mis-selling." The Dr went on to say: "How do we solve this conundrum? We are genuinely interested in working with banks to find a way to do so." I might add this was before Northern Rock fell apart under the FSA watch! We see this mantra repeated time and time again and I am reminded of the statement by Thomas Sowell: "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." -
I took issue with Dr Huertas on these two questions as I do with anyone who repeats this myth: I do not believe there was any evidence behind such a view and this is an "urban myth", constantly repeated by many in a position of authority and influence who should know better. Unless those who peddle this myth are challenged there is a very real danger that it will be further accepted as if fact as we have now see with the FSA Retail Distribution Review. It comes as no surprise to me that when challenged to provide evidence to support this myth they struggle. Dr Hueratas for example was unable to site any authoritative study that supports this anti commission proposition.
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