The Government investigation into long-term savings, announced last month, could have profound and far-reaching effects on the industry, in particular the remuneration of IFAs, and it will undoubtedly speed the day when IFAs have to act like true professionals and charge fees for their services.
The investigation is being led by Ron Sandler, former chief executive at Lloyd's of London and former chief operating officer at NatWest. The process has started with a consultation paper which is on its way to trade bodies, fund managers, banks and insurers.
The brief is to conduct a thorough review of the retail savings industry.
Particular emphasis will be placed on the effect that commission has on recommendations and whether it has proved to be a factor in the misselling of pensions, endowments and other products such as pension drawdown policies.
If it is not going to be a whitewash, Sandler will have to walk a difficult tightrope between stating the obvious – that commission clearly is a factor in misselling – and avoiding pointing out too forcefully that it is already a dubious factor in the selling of stakeholder.
The Government is clearly keen for stakeholder to be promoted but some life companies are offering up front commission of 40-50 per cent to the likely detr iment of with-profits policyholders since commission of 50 per cent clearly cannot come out of the 1 per cent management charge.
Sandler is also going to be looking at the effect of commission on sales of certain products – whether or not they may or may not have been mis-sold. Coming under his scrutiny will be with-profit bonds, all long-term savings contracts such as with-profits and unit-linked endowments, unit trusts and a whole range of other savings products.
It is difficult to see how Sandler, if he carries out his investigations rigorously, can come to any conclusion other than that there is a substantial min-ority of intermediaries who are clearly influenced by commission levels. If that were not the case, why would one product provider offer more commission than a competitor with the same product?
Where there are two virtually identical products with one offering better commission than the other, intermediaries can justify recommending the product with the higher commission since there is no detriment to the consumer.
But identical products are few and far between outside pure protection policies. Product providers have long experience of adding bells and whistles, often virtually worthless, to differentiate their product and justify a higher commission rate.
But what will the Government do if Sandler is heavily critical of commission and the effect is has on product bias? The common-sense conclusion would be to phase out commission altogether, say, over the next three to five years.
This could be difficult given that commission is a fact of life in the sale of a wide range of products from double-glazing to cars.
The alternative would be to standardise commission across all products or fix a maximum. However, this could be seen as anti-competitive and would certainly not be liked by either the product providers or many intermediaries.
Given that the 1 per cent regime will, in any case, tend to migrate to a wide range of products other than pensions, which leaves little or no room for commission payments, the Government may decide simply to do nothing.
Most likely the report will be buried along with a mountain of other cosmetic investigations.
But wise IFAs must realise which way the wind is blowing and will, if they have not done so already, switch their business to a fee-based advisory service. This will, no doubt, produce the usual roars of protest from the more reactionary elements of the industry but, if IFAs want to be regarded as true professionals, this is the only long-term answer.