Many thanks for getting stuck into the debate on our website earlier this week by responding to Neil Liversidge’s passionate open letter in a public forum. Taking the time to put together such a detailed response was much appreciated.
You appear a little shocked by the anger that greeted your comment that trail commission was “one of the industry’s best kept secrets”, especially as it came as part of a balanced and thorough piece on Ivan Massow’s new proposition.
Perhaps if I give a little more context you may better understand and appreciate why the comment caused such a strong reaction.
Trail commission, a legitimate method of payment used to some extent by the majority of our readers and accepted by the regulator, has come under a sustained attack in recent months from ill-informed “experts” whose opinions or shoddy research have been regurgitated by many in the mainstream press without question.
The biggest example recently was a report by Government-backed Consumer Focus which attacked IFAs and the trail commission they receive for causing pension churning into high charging funds. Reading through the report, the authors start from the blinkered position that trail commission is always harmful with little to back up their findings. But much worse is the fact the research behind these headline claims came from just 31 client files emanating from two IFA networks over a ten year period.
As you can see from documents obtained by Money Marketing as part of a Freedom of Information request, the FSA expressed its misgivings about drawing such strong conclusions in response to a draft of the report but this did not stop Consumer Focus ploughing ahead with it. Cue the scaremongering headlines across the mainstream press based on a pretty meaningless report.
You may have seen the Daily Express front page earlier this week declaring that “millions may be victims of rip-off financial advisers” with “Pension pots slashed by 75 per cent”. The news article is based on a new report from the think tank Civitas, called You’re on your own, which, although acting as an interesting history lesson about the relationship between state and private pension provision over the years, offers no rip-off revelations. The report touches on pension misselling in the 1990s and the FSA’s concerns about Sipp transfers in 2008 but nothing to warrant the such scandalous headlines.
Last year, the BBC Panorama programme ran an “expose” on pension charges which was, at the very least, pretty mischievous in its presentation of the facts around the impact of charges. For example, the press coverage promoting the programme, and the programme itself, focused on a statistic that pension charges could eat into up to 80 per cent of contributions, with no reference to the size of the subsequent pot. The day after the edition aired contributors spoke out in the media against the slant taken.
I mention these three examples just to illustrate the constant stream of misinformation around the issue of charges which is so often passed off as fact by sections of the media, and why the IFA community is pretty sensitive to hyperbolic statements in this area.
As many readers have pointed out the biggest losers of such sensationalist coverage are consumers who are turned off the concept of saving or protection due to unwarranted bad press.
With commission being banned from 2013 and the FSA, quite rightly, keeping a close eye on the ensuring there is no “closing down sale” in the run-up to this date, and with new propositions such as Ivan’s coming to the market, the issue of trail commission has returned to the public glare.
When discussing trail commission it is important to remember the different agreements and expectations around the payments that have been developed over the years. For some trail commission was a contractual entitlement agreed as an alternative to a higher initial charge with no expectation of ongoing service, while some contracts promise an ongoing level of service to justify the payments.
In the correspondence we have seen between the FSA and Consumer Focus this is a point the regulator tries very hard to get across and it can be assumed the presence of these contractual agreements is the main reason the FSA has not been more heavy handed in its handling of pre-2013 trail.
You would be right to suggest a continued lack of clarity from the regulators over the years has allowed an unhealthy confusion to develop over trail commission and most advisers would agree and support the FSA’s move to ensure that in future all ongoing charges must be accompanied by an ongoing service.
But does this all amount to secrecy on the part of the IFA? Has there been a deliberate agenda to keep costs hidden to the extent that it can be described as “one of the industry’s best kept secrets”?
As many on the website have pointed out, adviser payments must be clearly disclosed in client documentation. There is certainly an issue over whether clients pay enough attention to the charges they can expect to pay (and remember how much they are being charged when asked in a market research survey). But I do not think such a sweeping statement on secrecy is warranted given the way the majority of IFAs conduct themselves.
The GfK Financial Services Consumer Panel research you quote was based on a tiny sample from a qualitative survey in 2008 (the numbers are not quoted in the report and the FSCP don’t know how many people were questioned!) while the “46 per cent” statistic also appears a bit dubious if you dig a little deeper.
The statistic comes from some Consumer Focus research (yep, them again). They have so far failed to respond to our requests for more information about the statistic but it appears to have been generated from Question 9 of this report (page 39). I’ve copied the question below:
Q 9. Pension advisers often get paid trail or renewal commission, which is an ongoing payment the adviser receives from the pension company paid either as a percentage of the total value of the pension fund or as a percentage of contributions you make into the fund. Have you heard of this?
Yes- I have heard of this and I believe my adviser is paid on this basis
Yes- I have heard of this but I am not aware if my adviser receives this or not
No- I have not heard of trail or renewal commissions being paid to pension advisers.
Now, look again at the extract from the MPs’ report that you quoted: “Consumer Focus warned that “The existing charging structure for advice is poorly understood. Most (56 per cent) personal pension holders who took their last personal pension with an adviser have heard of trail commission. Of these, only 46 per cent are aware of whether their adviser received trail commission.”
In this context the 46 per cent is pretty meaningless as there is nothing to say what proportion of the 46 per cent had advisers who received trail commission for the respective products and how many did not.
This is not to say everything is perfect in terms of disclosure. Recent British Population Survey research found that 28 per cent of IFA clients either did not know the charge or thought there was no charge on the product they were advised on.
I think all our readers would agree that this is too high but I would suggest this was due to a range of reasons; the disclosure forms required by the regulator, the need for better education about the cost and value of advice, a bit of poor memory and, in some cases, poor advice But I do not think “secrecy” is the overriding driver.
Anyway, my rambling letter has already taken up far too much of your time but I hope it offers a bit more of an insight into the raw nerve your comment touched.
I’m sure our readers are in agreement with you about the need to offer a top quality service to clients in order to justify any costs incurred by the consumer. IFAs are the agent of the client and will only succeed if they are on the consumer’s side. They also suffer from poor behaviour in the sector through increased Financial Services Compensation Scheme costs.
Hopefully you’ll pop back onto our website from time to time and get involved in some other discussions.
All the best,
Paul McMillan is editor of Money Marketing- follow him on twitter here