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The meaning of free advice

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It had been my intention this week to write about the interview given to Money Marketing by Aifa director general Stephen Gay and the trade body’s chairman, Lord Deben.

There are a few little nuggets worth teasing out in their dialogue with MM editor Paul McMillan, which I hope to do at a later stage.

But that will have to wait a little while because, in a straight choice between the words of two grown men sitting cosily next to each other on a sofa as they finish each other’s sentences and the opinions of real-life IFAs who read this paper, it is the latter who win out.

Last week, I wrote that the reason why many financial advisers opposed the RDR was not the requirement of having to meet the FSA’s new qualification requirements but the move away from a commission-based system of remuneration.

I had expected a massive tirade against my remarks, yet, when they came, the comments were much more nuanced.

They are striking by their anger, honesty, naivety and - to my surprise - occasional agreement with the views I was expressing.

For example, there is the adviser who wrote, condemning my “anti-IFA rant” and then adds: “I totally agree that there were many useless IFAs before regulation. The FSA has not really changed this position and we all know many of the original failures just left the industry.”

Wasn’t that one of the indirect aims of regulation, to make life so tough for some that they left?

Confounding my suggestion last week that the majority of IFAs opposed to the RDR were those over 60 or approaching it, one email was refreshing: “There is a lot of truth in your accusation that many IFAs are mainly concerned about the loss of the old-fashioned commission option.

“I am just 60, and have spent all my life in financial services. I very rarely take full commission (maybe for a very small case), and always raise the issue of costs/charges/ commission. Occasionally, I charge a fee instead.

“However, as we get older, it becomes more difficult to retain information that is only required for exam purposes. I had 110 points of the necessary 140 points at the beginning of the year. I took the G60 exam out of choice many years ago, and enjoyed it. Last week, I passed the R04 exam, after stressful studying. Only 20 points to go - hooray.”

Another adviser, who has spent more than 30 years in various areas of financial services, wrote: “I am in my mid-50s. I do not agree with you [that advisers are more concerned about commission income rather than examinations] but I think you might have a point.

 ”I am fortunate in that I was offered access to occupational pensions when I first started working and, for me, retirement income will not depend on my earnings from client commission.”

But he adds: “I know that a lot of advisers have built a business in the hope that trail income and perhaps some business premises will become their income stream into retirement. In my opinion, that is complete stupidity.”

Contrary to my assertions last week, for this adviser, it is the challenge of obtaining the new qualifications that matters: “Like many people of my age, I find absorbing and retaining information is difficult.

“I am not against training or developing new skills but having my future determined by answering questions in a three-hour exam is awful I fail to understand why the regulator cannot sample the advice I given to clients over many years and then be in a position to evaluate my ability, skills and knowledge.”

By contrast, another IFA wrote in: “The advice sector continues to be populated by one-man-band, under-qualified, second-rate individuals whose business model is predicated on the acquisition of one or two new clients each month and the necessity for each of these new clients to generate disproportionate levels of commission.

“The RDR has made such a business model defunct and thank goodness for that, the advice sector will be a much healthier place without these people - and you’re right, I am only 46.”

Another adviser simply said: “Hit. Head. Nail. On. Just to bugger up your email stats further, I’m 42.”

Unfortunately, confusion still reigns on the issue of whether, in a commission-paying environment, advice is “free”. One IFA told me: “I have never given clients the illusion that advice and my work is ’free’, I deal with people who are more sophisticated than that.”

By contrast, another said: “All my advice is free to the majority of my clients who choose the commission route. I will have two appointments with them and in between first and second they would receive a full written report from me. If at the end of the second appointment they choose to walk away it has not cost them not one penny. In my naive little world, is that not free?”

It might be - but is this a viable business model? You tell me.

Nic Cicutti can be contacted at

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Readers' comments (28)

  • This is a pretty lame article, Nic. Looks like you hurried this one and just used others comments to pad it out.

    Advice is frequently free and yes, this is not a sustainable business model if too many clients receive free advice. However, the nature of client/adviser interaction is that we do offer free advice and we do use in-built commission to provide a product purchase where the client does not have to physically part with funds.

    This is called consumer choice and as a consumer champion you should be encouraging freedom of choice rather than follow the FSA notion of restriction.

    Winston Smith wouldn't settle for this.

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  • nice one Alan

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  • I agree that a lot of really bad, and often daft, advisers left the industry, years ago, because of regulation (which was a good thing) but you mention the word naivety in your article and it is just plain naive to think that the die hard, dishonest practitioner in any business, including ours, is going to be stymied by the RDR. They won't, which is partly why the RDR is a farce. It will force good IFAs out, which some people have termed as throwing the baby out with the bathwater. Except this could be throwing the baby out but leaving the bathwater in, to become more stagment by the day.
    Also, Nic, I cannot understand why your are against the client having the choice between commission and fees. What exactly is the problem with that? I have asked several people this question, over the last few years, and have never had an answer. If you would care to furnish one I would be most grateful. If I have missed it, in the past, you have my apologies.

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  • Here Here

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  • Not much value add in this article - there is more to gain from reading the comments in the context of the last one - poor show, I feel.

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  • Fees and commission.
    One point that seems to be forgotten in this is the less well off client.
    Many of the people I have dealt with over the last 30 years cannot afford fees up front. They would prefer a product charge (commission) perhaps paid for over the lifetime of the contract.
    It is these people who will be denied the independent advice they need and be driven into the greediest bunch of robbers, the banks, or who will do nothing for their financial security.
    More sophisticated clients appreciate the need for fees and can generally afford them.
    Often a liitle bit of simple advice can help a client, but if we have to justify it with a long report, the cost begins to outweigh the benefit.
    With regard to the exams situation, I qualified 10 or so years ago for the diploma and endorse the need for knowledge. However, taking exams at 57 is a struggle, particularly as many of the answers are strange in relation to the questions set. Cost is also an issue as the CII seem to have forgotten that their customers are also members.

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  • Advice can only be free when there is no 'product' involved.

    As soon as you introduce a (typically insurance company manufactured) commission paying product, the consumer will pay dearly over the term of the plan in higher ongoing charges to (often over-) compensate the seemingly generous insurance company who remunerated the adviser when he/she .

    Advice then, is never free when commission is involved.

    The common illusion of 'free advice' is fuelled by commission contracts, which can be dangerous.

    Clearly if a consumer is under the misapprehension that advice is 'free' when making a purchase, it naturally follows that they will feel that they are receiving good value for money, after all 'free advice' is keenly priced! However, the adviser could all the while be receiving an enormous payment for very little work by selling a shoddy plan - not the outcome as perceived by the person ultimately paying for this service.

    If many advisers are still missing this point, then I can see how many more consumers might also struggle, as long as commission products still roam the earth.

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  • Advice is never free. There is no absolutely such thing as free advice. Sometimes it is not paid for by those that receive it, in which case it is simply paid for by someone else i.e. other clients. In the extreme example it is paid for by the adviser because he has no other clients to pay for it, but that is a very short term situation as the adviser will very quickly go out of business. So, there is an element of cross-subsidy. Those that can overpay do, and those that can't afford advice get it subsidised. This situation diminishes where advice is paid for at an hourly rate rather than by commission, but it won't disappear. People like Robert Reid proudly proclaim that they give 'pro bono' advice to some clients. How can they do that? By charging other clients a lot of money. Enough to allow the adviser a bit of free time to do some good in the community. In other words a cross-subsidy. But it isn't free.

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  • I gave up providing free advice ten years ago. Those who won't pay (and for my pre-sale report and recommendations, they aren't asked to pay a lot) don't get. My business isn't funded by charitable donations or by the local authority.

    For implementation, clients can pay either a further fee or by way of a pre-discussed and agreed deduction from the sum they invest. Presenty, the latter's called commission. Eventually, it'll be called an Adviser Charge.

    But how can anyone meet the overheads of running a business without charging for it? Unless, of course, the "free" advice upfront is, in fact, a speculative pitch for a commission-generating sale. I won't do it.

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  • @Alan & others. I'm intrigued at how some of you appear to find find comments by your fellow-IFAs, of which I received several dozen on this subject in the past couple of weeks, not worth reading. Your contempt for other advisers' views is duly noted, however.

    Not entirely sure what your allusion to 1984 is all about either, unless your face has been chewed off by rats recently. Enlighten us.

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