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Borne in the USA

The US is often accused, sometimes rightly, of leading the world in financial matters. It has blazed a trail by embracing direct equity investment, showing an increased propensity to invest in mutual funds and indicating a generally higher perception of investment risk.

The US consumer is also far more willing to pay directly for financial advice through fees rather than commission. But if the US is leading the way in many areas of finance, it is doing so largely without calling its advisers independent.

In the UK, the loss of the term independent for any adviser getting commission is one of the objections to the FSA&#39s proposals on polarisation. But this type of setup already works well in many other countries, especially the US.

In the US, the bulk of financial product distribution is through captive salesforces. This channel accounts for more than two-thirds of all sales and companies have big tied salesforces. For example, Axa Financial has around 7,000 registered tied agents.

As well as these tied salesforces, there are independent financial advisers who typically work on a self-employed basis and act as brokers for various companies, in some cases, providing a fee-based financial planning service rather than or in addition to earning commission by selling products.

These advisers closely res-emble the FSA&#39s proposals for independent advisers in the UK and make up around 20 per cent of the US market.

Additionally, financial products (principally, insurance) are sold direct although this distribution channel accounts for only about 10 per cent of new business (not necessarily true for securities other than insurance) because it tends to be the low-cost providers offering products that need little advice.

In the past, the tied salesforces were restricted to selling the products of the insurance company they were tied to but, as in the UK, this is no longer the case.

With the advent of fund supermarkets in the US as well as the rapid pace of innovation in product features, the concept of offering products from other companies became more acceptable and this practice was extended to a broad range of financial services products.

This means that while fin-ancial advisers agent may sign a contract with one insurance company (essentially operating as a franchise of the company), as long as they have permission from this insurance company, they can sell the products of other companies, too.

When recommending products, advisers are required to provide details of the charges and fees within a product but there are no requirements for them to disclose which company they work for.

Neither do they have to reveal how much commission they get from a sale (although that information may appear in confirmation statements sent to clients).

Typical commission levels on life insurance would be around 50 per cent of the premium in the first year followed by annual renewal commission. Although the disclosure of commission levels is not a huge public concern, given the disparities between insurance and other securities products, there are discussions to move to a more level commission structure to limit churn.

Opening up the range of companies&#39 products that an adviser can recommend has led to an increase in standards. (I am not sure about the logic of that statement.) Although the profile of the tied salesforce varies from company to company, it is becoming increasingly common for university educated professionals to become advisers.

This shift has already started in the UK, especially in the independent sector, and it is likely that the proposals in CP121 will raise standards further, especially as the public perception of financial advice improves.

In the US, each state has its own licensing requirements. However, before they can provide advice services and sell securities&#39 products, an agent must pass registration exams and other qualifications.

Advisers agents can also take further qualifications that will add to their knowledge, skills and status, including financial planning degrees and, more commonly, certified financial planner qualifications, which are held by around 20 per cent of practitioners. Further qualifications of this sort generally lead to higher earnings.

Earnings for tied advisers can be high. The average in the first year is around 25 per cent higher than the national average income and good advisers can earn even more, with incomes of more than $150,000 (£98,000).

Because these tied agents are a key distribution channel for the insurance company, there is a full range of company benefits provided as well as loans for business, office space and other infrastructure services. Insurance companies also reward according to the revenue generated and the highest producing advisers can expect even more benefits. Top-level associates sometimes hire employees to manage their practice or are provided with other company services that further tie them to the company payroll services.

Distributing products in this manner has benefits for the insurance company, too. First, they can increase their distribution by selling their products through the salesforces of other companies. As one of their advisers may recommend another company&#39s product to make their advice more complete, perhaps filling the gaps in their employer&#39s product portfolio or providing a client with a product that better suited their needs, it raises the status of the adviser and ultimately the insurance company. It also provides the client with the product that best meets their needs.

Although the US stance on advice may seem more relaxed than in the UK, the US financial services market does face its own problems and challenges as a result of the state and federal regulatory systems.

Different states impose different regulations not only on the sale of financial products but also on their design. For instance, when it comes to seeking state approval for an insurance product, New York is often the toughest state to secure approvals followed by California and Texas while the South-western states tend to be more lenient.

Often, other states will follow the lead of these states or develop their own requirements to ensure the state&#39s population is protected.

The need for separate approval from each state can add considerably to the cost of bringing a product to market – a cost that is invariably picked up by the consumer – and it can also be a barrier to establishing a national sales strategy. Individual states also monitor/regulate the behaviour of individuals licensed to sell financial products within the state.

Elements of financial adv-ice, most commonly, investment advice and the sale of investment products, are regulated by federal and government industry “self-regulatory” bodies. 1940, a self regulating body set up under the Maloney Act in 1938, was established to self-police the industry.

To make life even more complicated, there can be anomalies between and even within states. For example, Wyoming does not regulate investment advisers and so they must automatically register with the SEC regardless of the level of their business.

This patchwork approach invariably leaves some areas unregulated, whether nationally or just in certain states. However, in spite of this, the market is relatively trouble-free and while scandals do happen, these incidences are far from endemic in the system.

Cultural differences may be the key to ensuring this system is effective. As litigation is almost a way of life in the US, insurance companies are determined that in addition to the regulation in place, self-regulatory systems, coupled with sturdy complaint compliance procedures, are effective.

However, it seems to work and must surely set a precedent for how a financial services market can flourish under a depolarised regime.


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