View more on these topics

Commission – saving grace of the industry?

Banning IFAs from being paid by commission would only serve to widen the gap between the amount of money people need to put by for retirement and what they are actually saving, warns an influential report.

The Oliver Wyman & Co report, commissioned by the ABI to help shape its response to the Sandler review, estimates there would be a drop in annual savings of £4bn in the event of a wholesale ban on commission.

The report&#39s detailed analysis confirms what IFAs have said all along – that the lower end of the market is not ready to pay fees for financial advice. The only options for the less well-off are to pay commission or not to buy into any financial products at all.

In the absence of financial advice, many people simply do not save. This scenario is the opposite of the Government&#39s objective of shifting the balance between state and private pension provision to 40/60 from the current 60/40.

Ron Sandler, who is conducting a Treasury-sponsored report into the retail financial services market, should be warned to heed the report&#39s findings as, ultimately, he will be judged on how successful his recommendations are in leading to a narrowing of the £27bn savings gap.

The weighty and empirical research of OW&C cautions that if a preoccupation with commission bias leads to the end of commission, the problem will worsen and Sandler&#39s review of long-term savings will be remembered as failing the Government and the public.

That said, some IFAs clearly recognise the need for change in the way commission is paid and at what levels, alongside an ongoing shift towards fees.

Beechwood Financial Services partner Philip Boon says: “I think undoubtedly there are occasions where commission has been paid in disproportionate levels and it has been significantly overpaid to IFAs. Generally speaking, with most investment clients, they are willing to pay fees when they recognise the benefits. At the lower end of the market, clients are not so willing to pay fees so they will have to be educated.”

So how far should the industry go to deal with the perceived problem of commission bias? OW&C suggests an alternative model for commission disclosure – the payment plan – under which commission would be shown in the form of a fee payable on completed transactions. Using an attached payment plan, the provider would pay the fee out of charges taken from the product over time.

The argument goes that the consumer could then choose to pay the fee or sign a payment plan document which would be separate from the application form. This kind of transparency might deal with a perception of commission as lurking somewhere in the small print.

Wentworth Rose managing director Philip Rose says: “When it gets to the lower level of incomes and smaller amounts of money, it is difficult for people to cover the cost of advice and evidence suggests these people are resistant to fees over commission.”

The OW&C analysis also reveals that consumers who take financial advice invest 21 per cent more than those who do not. It says even if those who seek advice are more predisposed to make investments, advice adds at least 10 per cent of extra savings per consumer.

The report also tries to demonstrate that if employers were compelled to pay for advice, this would generate an extra £11bn in annual savings. But a ban on initial commission in favour of fund-related remuneration would hit the annual savings total by £2bn.

Other startling figures included in the report suggest that potential sales each week for IFAs dropped by nearly 50 per cent to six a week in 2000 from 10 a week in 1995.

Sales time per client increased to six hours in 2000 from three-and-a-half hours in 1995 at the same time as charges fell by 35 per cent. The odds against continuing profitability seem to be stacked against advisers.

The figures back up Aifa director general Paul Smee&#39s call for a reconsideration of the legal, compliance and regulatory demands on IFAs dealing with existing clients, which he feels could be streamlined.

Smee says: “Looking at the report as whole, you can see it is an important and valuable document. It illustrates that it is now becoming more and more accepted that, if you take away sources of advice, people do not find new and interesting places to invest – they simply do not do anything at all. This is good to know and should be known intuitively.

“It is clear there are ways the process could be streamlined but what I am wary of is anything which suggests an easy solution. There are several pressures on IFAs&#39 time, including both requirements of compliance as well as legal requirements in case of future query.”

FSA chairman Howard Davies is apparently preparing to welcome proposals for lightening the regulatory burden on IFAs after N2, so advisers might see their potential sales time creep up again.

Recommended

The FSA must not undermine the role of IFAs

The FSA must not become an IFA of last resort. The A in its name stands for authority not for adviser.In the week the regulator adds pensions to its controversial league tables, it has admitted that one item on its wishlist is to set up a fact-find on the website to look at consumers&#39 circumstances […]

1

Opinion poll

The report (Money Marketing, October 25) that Marlborough Stirling&#39s research has found that 53 per cent of people prefer not to meet their financial adviser in person flies in the face of general perceptions. It also contradicts other (perhaps more disinterested) research studies as well. Typically, you would expect to find that some 70 per […]

New fixed rate bond from Chelsea

Chelsea Building Society is launching a new fixed rate bond offering a gross annual return of 4.5 per cent.The Chelsea Fixed Rate Bond 2003 opens on November 8 and will offer the fixed rate until June 2, 2003. The minimum investment is £1,000.The bond also offers a monthly income option, with a slightly lower interest […]

SG Hambros links deposit account to FTSE movements

SG Hambros is introducing a three-year deposit account which offers 3 per cent annual income along with stockmarket-linked growth and 100 per cent capital protection.The FTSE 100-linked deposit account is designed for risk-averse cash investors who want to outperform interest rates in the medium term.The account guarantees to pay 3 per cent income a year. […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com