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Commission control

As our regulator struggles to reinvent the wheel, yet again we return to the central and most fundamental issue within our industry.

The whole question ofthe status of the client&#39s adviser, independent or tied, and how he is being influenced by the commission payment, is undoubtedly the key to client protection and adviser regulation.

How many times over the last 19 years (my personal service as an independent adviser) has this issue been rai- sed and then dashed in exchange for vested interests?

We must come to terms with this issue and we must resolve it once and for all or we shall never achieve professional status, misselling scandals will continue and an ever more complicated web of regulation will be imposed.

As we know to our cost, the proliferation of regulators simply serves to create another industry – and an expensive and ineffective one at that.

Polarisation is not a complicated issue. It benefits the public. They fully understand the concept of independent or tied agent because it is basic common sense. The fact that they may choose one or the other as a source of advice is simply due to their own personal preference. It may be, and often is, purely because they trust one person more than another.

The unpalatable truth is, regardless of the source of advice, the public generally believe that the financial advice they receive might quite possibly be warped or tainted by the need for the adviser to be paid. They also believe this could be the case, regardless of whether the adviser is working by fee or by commission.

If you do not believe me, just ask anyone what they think of solicitors. The payment method of the adviser is the fundamental issue that we need to address if we are seriously going to discuss the quality of advice.

Regulation and training cannot resolve this basic point. If the adviser and his recommendations are going to be influenced by the potential commission, no amount of regulation or training is ever going to make him into a moral professional adviser.

The quality issue can only be addressed effectively if we remove as many bad financial influences from the adviser as is humanly possible. The fact of the matter is that certain financial advisers will be influenced by immediate financial remuneration.

Are we seriously going to try and argue that with-profits bond A which pays 7 per cent commission compared with with-profits bond B which pays 4 per cent commission, is not going to influence some advisers somewhere? For heaven&#39s sake!

Before we dismiss commission to the dustbin, let me be absolutely clear. There are some commissions that provide very positive encouragement indeed. Renewal/fund- based commission, for example, encourages longevity of client relationship, care, and due diligence. This is sometimes called service.

However, even the renewal/fund-based commission is often “stolen” from the client as well as the day-to-day financial adviser because the investment company insists on paying it to some obscure past adviser that the client no longer deals with.

The solution is actually incredibly simple and it only requires simple primaryregulation.

1: All investment products, savings schemes, lump sums, regular, single, qualifying, non-qualifying, pensions and Isas should be subject to a maximum permitted commission, with a maximum permitted fund based renewal.

I would suggest 4 per cent on investment contributions plus 0.5 per cent a year fund-based renewal. The financial influence on the adviser&#39s product selection process has now been removed.

The adviser is much more able to consider the client&#39s best interests without his own remuneration clouding the issue.

2: The industry should be required to pay the renewal/ fund-based commission to the adviser of the client&#39s choice, and allow the client to change his adviser as he wants.

Service and client loyalty would become uppermost in the adviser&#39s mind. The client can then choose who he pays his renewal/fund-based commission to in order to secure the specific services that he desires. The connection between “long-term quality advice” and “adviser remuneration” is now permanently secured.

3: All indemnified commission payments and company charges, including surrender penalties, should be banned from having any impact on the client&#39s investment, should he choose to stop, start, increase, decrease or withdraw from his investments.

The client is then no longer financially locked into dreadful products and poor services.

The insurance and investment companies will no longer devise contracts specifically designed to mislead the public and financial advisers alike.

The client can now afford to make a mistake when seeking advice because now it can be easily corrected.

These easy regulations will instil a financial desire among advisers to attain, keep and nurture clients for the long term while also allowing substantial remuneration at the outset of the client relationship. If our regulators had been brave enough and produced this type of regulation in the beginning, neither the “pension review” nor the “home income plan scandal” would have occurred.

With these regulations in place, not even the developing endowment scandal would have happened.

However, even if it had, it would have been a non-event because the solution wouldbe immediately apparent.

The insurance companies are providing us with a perfect illustration of the classic problem and the typical industry reaction. Have they any idea how ridiculous they look when they suggest that the solution to an underperforming endowment is to buy another one? How many advisers are going along with this lunatic piece of advice? Of course, it couldn&#39t be anything to do with the exorbitant commission could it?

These ideas will not resolve everything within our important profession but they will do 10 times more thanthe regulators have achieved since 1986.

Some additional welcome benefits would be that the regulator&#39s rulebook would shrink (as indeed will the regulator) to a shadow of its current self, and hard disclosure would become generic.

Quotations would become a costed replica of the precise effect of expenses on a spec-ific company&#39s product andproduct comparison wouldbe dramatically simplified.

Why has such simple regulation never been attempted before and why won&#39t it be attempted now either? Because there are far too many “fat cats” with vested interests sponging their indefensible salaries from the industry.

Interestingly, most of these people have absolutely no concept or experience of product design or client contact and yet many of them persistently hold themselves up as innovators and saviours of professional standards.

If we were selling carpets or cars, it probably would not be the problem that it is. But we are not.

We have got to take responsibility for the fact that we are dealing with real people&#39s lives, financial well-being, futures, dreams and desires. Clients are long-term investments, requiring long term care and due diligence.

Advisers will be well remunerated, and quite rightly so, but the “hit and run operation” and the commission that encourages it must go.

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