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Commission and factoring make advice affordable

THE EDITOR’S COMMENT OF THE WEEK

I was interested to read Alan Lakey’s article on the problem his clients have with fees. I recently saw a 25-year-old plasterer wanting advice on a pension. He wanted to see me at his home in the evening to discuss it in broad terms and then to see me again, same time, same place, to conclude the transaction. The total time spent on the whole process, including travel, research and writing a recommendation letter between the meetings, came to around five hours.

If we forget the travelling time, at £150 an hour, that should theoretically earn me £600. This, however, is an individual who is unsure if he can afford £50 a month net, so you can imagine how little chance there is of him paying a £600 fee.

On the other hand, he is completely happy for me to be paid commission and for the cost to be spread over the life of his investment. He is in business himself and he understands that I need to get paid for what I do and that he ultimately pays for my commission just as everything he buys in his business contributes towards somebody else’s pay packet and pension.

At this point, a certain type of adviser will no doubt lecture that IFAs are not charities and that this is the type of client who should be sent to a bank. However, he wants me to do the job and as I look after the rest of his extended family, I do not want to give him the brush-off.

Throughout the RDR debate, the FSA’s sub-text has been that commission is automatically always and irredeemably bad, likewise factoring. Where single-premium investments are concerned, I do not have a problem with the move to fees. I have operated on a fee basis since I launched my business in 2004 before the RDR was ever thought of. But where regular-premium business is concerned, particularly pensions, the FSA is so wrong.

The commission basis of payment means that the adviser accepts a risk that he or she will ultimately not be paid in full for the work they have done if the policy is discontinued or payments are reduced. Yes, the client pays for it but that cost is clearly disclosed. Yes, the client would have more in his pot at the end of the day if no commission were deducted from that pot at outset but so what?

If the amount paid as a fee at outset were invested in the plan instead, the pot would be that much bigger. Commission and factoring merely make advice affordable for the client to obtain and for the adviser to deliver. Looked at another way, if IFAs did not have to pay so much to the FSA, the FOS and the FSCS, if chasers were not able to abuse the FOS’s service for free and if dishonest clients were not free to lie with impunity and, with the protection of the FSA, to attempt to get a pecuniary advantage by deception, our businesses would be cheaper to run, with the result that we could charge much less, so the client would be better off that way.

Neil Liversidge
West Riding Personal Financial Solutions, West Yorkshire

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. A quick look at Neil’s website and you can see that he offers a great service to his clients making himself available 24/7 he even publishes his mobile number so that clients can contact him in out of office hours.

    Of course his Plasterer client wants him to “do the job” for him. Neil after all is prepared to travel and see him during what sounds like unsociable hours and he comes highly recommended.

    Neil has worked out the cost of delivery of pension planning advice at £600 it is just that the Plasterer doesn’t want to pay it upfront (or possibly can’t afford to pay it). He is however prepared to pay in instalments by charges levied against his proposed pension contributions.

    Two things spring to mind. I wonder if he quoted a plastering job at £600 and the prospective client said OK but I want to pay you £20 per month for the next 30 months he would say “yes”? I somehow doubt it don’t you?!

    Secondly I do think that a common factoring figure for regular pension and investment plans would solve the problem but I understand it is not the FSA who are in the way of doing this but the OFT. Apparently such a move would be anti-competitive!!

    But the problem I have with commission is not that it introduces product bias. There is as far as I am aware no evidence to support that. The problem I have with commission based cross subsidy is that it results in “poor people” paying for the delivery of advice to even “poorer people” and I just don’t think that can be right

  2. Somebody somewhere has to pay eventually, even for the ‘free’ MAS which must be some form of ‘cross subsidy’?

    The FSA wanted to remove provider influence from the advice process, a laudable aim. When I asked the FSA about factoring they said any third party could provide this service for ‘future commission payments’.

    ?

    Anyway, will ‘provider influence’ still be around after the RDR takes effect? Only for the mass market it seems, the Man from the Pru is making a comeback, Derek was right.

  3. I don’t see any ethical problem with cross-subsidy. Do high earners who pay a lot of tax and NIC receive in return from the State anything like value for money? Of course they don’t. Their larger tax and NIC payments cross-subsidise the less well-off members of society, not to mention immigrants to the UK who often receive an array of State benefits in return for having paid absolutely nothing into the system.

    And what about less well-off clients who simply don’t have the means to pay fees to practices like Informed Choice? What do you say to them, Nick?

  4. @Julian

    Sorry for the delay in responding

    Just like any half sensible business we say “no thank you” (in a nice polite way) to anyone who doesn’t have the means to pay for the services we offer. To provide a service to someone who cannot afford to pay for it is not to be in business (I think it’s called charity.

    I worry that you cannot see the immoral nature of cross subsidy making poor people pay for the services to poorer people. To compare taxation (compulsory) with the delivery of independent financial advice (voluntary) is very weak.

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