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Boggy trail

Most of us are familiar with the famous Mrs Merton TV interview a few years ago in which she asked Debbie McGhee: “So Debbie, what was it that first attracted you to millionaire Paul Daniels?”

In a similar vein, every time Peter Hargreaves pops up to talk about the iniquities of indemnity commission, I am always tempted to ask him: “So, mass-scale discount broker Peter Hargreaves, what is it that leads you to slag off up-front commission?”

In recent weeks, Peter – a man I respect enormously for his business acumen – has stirred up a hornet’s nest with an article in Money Marketing in which he wrote that he had “absolutely no doubt in my mind that within a few years the genus that everyone calls an IFA will be as dead as the dodo. They are an endangered species.”

The cause of IFAs’ demise, he argued, was “unacceptable, obscene, leapfrog indemnity commission” now being paid by “stupid, irresponsible, incompetent life companies” to advisers for selling their products.

In a world where providers become desperate to attract large-sized chunks of their rivals’ money, it will be hardly surprising if consumers start to become fed up with churning, leading to a regulatory crackdown, the introduction of fees and the demise of IFAs, says Peter.

His alternative is a simple one: “Investment products should have a built-in service charge but no initial commission. That would mean that any investment could be taken over and provide remuneration to the person who looks after the client.”

It doesn’t take a genius to work out that the solution proposed by Peter is one which most closely mirrors the successful business model used by his own firm, Hargreaves Lansdown, to great effect over the past 25 or more years. His company now manages a sum nearing £1bn of clients’ funds. Assuming trail commission levels of 0.5 per cent, that means Hargreaves Lansdown is raking in vast chunks of money, even if its business were simply to stand still, which it clearly does not.

The real question is not whether abolishing indemnity commission is the real answer to the industry’s problems. To understand why, let’s go back to basics. What is indemnity commission paid out for? It is paid in return for selling a company’s products.

A more charitable interpretation might be that it is a payment for the work involved in carrying out a fact-find, reviewing a client’s needs, doing the necessary research work, recommending a solution to meet a given need – which may or may not involve a purchase – and then setting up that investment, pension or other product as required.

Although Peter does not say so, he indirectly hits the nail on the head of the fundamental problem behind indemnity commission. It is a payment which in many instances bears no relation to the actual amount of work involved in providing a solution to a client’s needs.

It is the bluntest of remuneration instruments, a fact recognised by many IFAs who are willing, where possible, to rebate some or all of that commission back to the client, based on an agreed hourly rate for the work they do. Even so, no one pretends that it is a perfect mechanism, hence the growing pressure for fees as a better way of matching time spent with payment for service received.

That leads me to another issue, which Peter conveniently ignores. When he talks about a “built-in service charge”, what he means is the trail payments that he and all other advisers receive for having sold that product in the first place.

For a client who has built up a pension and investment portfolio over many years, it can mean many hundreds and sometimes thousands of pounds being paid into an IFA’s business account every year. That may be financially gratifying for the adviser but what does the client get out of it? The answer, all too often, is zilch.

I have friends with more than £150,000 in various investments, netting their IFA at least £750 in trail commission each year. Yet because by and large they have no immediate investment – or complaint – to make, they have received not even a phone call or a letter from their adviser for the past two years, let alone a review of their finances. All their financial statements come directly from the provider or fund platform.

The reality, and Peter must know this, is that trail commission is also a terribly blunt instrument. It rarely corresponds with the hours spent by a diligent IFA reviewing a client’s ever-changing circumstances. At other times, trail simply becomes an expedient way for an IFA to be paid for doing nothing.

Which is why, if we were to carry through the logic of Peter’s argument, it isn’t simply indemnity commission that should be scrapped but trail too. The IFA then charges on the basis of the real service that he or she provides the client.

Of course, that is not what Peter is calling for at all, which is why I tend to file articles like his in my special folder, the one marked: “Self-interest”.

nic@inspiredmoney.co.uk

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