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Commission to visit the land of the fee

Commission has traditionally been the way that salespeople are

remunerated, wher-eas fees are paid to professionals such as lawyers and

accountants.

IFAs, in the public&#39s eye, seem to straddle a position between being

salespeople and professionals. But scrutiny on commission is likely to

intensify with the son of Myners&#39 review under Ron Sandler and the FSA&#39s

with-profits review both under way. The accusation of commission bias is

one that IFAs have had to deal with for some time and charging fees is one

way of countering it.

IFAs at the bread and butter end of the market are far and away the most

reliant on commission, often exclusively, leaving fees predominantly to

those advisers targeting wealthier or corporate clients.

Hartlepool-based Independent Financial Services director Jim Gillespie

says this has also a regional aspect. In less affluent parts of the country

such as the North-east there will be a smaller market for fee-based advice.

The balance of fees to commission also varies according to product type,

with IFAs reporting that clients are more resistant to paying for advice on

pensions and mortgages rather than investments.

However, IFAs considering moving to fee-based work find that things are

not clear cut. An irony is that many IFAs who are fee-based say they are

willing to work on commission to enable those who would otherwise not be

able to afford their services to have independent financial advice.

IFAs who have turned to fee-based practice come from two schools of

thought. First, there are those who see it essentially as a marketing tool

and a means of convincing clients of the probity of advice that they will

receive. Then there are those IFAs who do so as a means to ensure they are

remunerated for all the work they carry out.

Advisers such as Philip J Milton and Co managing director Philip Milton,

who see fee-charging as a promotional feature, extend this to offering free

initial consultations. The fees are then based on what personal involvement

the client wants from him, together with the overall level of service

required.

On the other hand, Kangley Financial Planning managing director Geoff

Kangley&#39s rationale for charging fees is quite simple – he does not believe

he should provide advice on which he could be sued without being paid. He

points out that an IFA working on a commission basis might do a lot of work

for a client who in the end decides not to go ahead, effectively leaving

those who do proceed to buy subsidising those who do not.

However, commission remains the dominant means of remuneration. Expressing

perhaps the most common view among IFAs, Gillespie says there is simply too

much client resistance to fees at present, even for a firm such as his

which is run from an accountancy practice.

At present, he is happy for clients to think that they are getting free

advice without any pressure to buy. “I would hate to think a client would

be prevented from talking to me because they were not sure they could

afford to do so,” he says.

SFC Investment Services managing director Frank Cochrane&#39s practice is

50:50 fees and commission. He says the most popular solution among his

clients is a hybrid between commission and fees. The initial sale is

carried out on a traditional commission basis but continuing service then

attracts a fee.

Cochrane says he always discloses commission levels to clients to see how

much they would save by paying fees and enable them to make an appropriate

choice.

Providers manufacture products to take commission into account. Clerical

Medical pensions strategy manager Nigel Stammers says IFAs can pass

commission on to clients as cash, use it to enhance the product terms or

take it as remuneration. He points out when it comes to pensions, there is

a distinct advantage to commission as the charges are then tax-privileged.

Kangley gets over any confusion by running a notional client account. If

he does not take commission, the client is invoiced for the shortfall.

He has a straight-forward suggestion for IFAs wanting to calculate an

hourly rate. He says IFAs have to add up the entire costs of running the

business, including all ancillaries and things such as professional

indemnity insur- ance, add the amount they want to earn annually and then

divide it by the number of weeks and working hours.

The major admin issue for fee-charging IFAs is the thorny issue of VAT.

The current rules suggest that if an IFA is charging a fee directly

related to advice on a sale, it does not attract VAT. But if it is deemed

that an IFA is invoicing for a service, then it does incur VAT. The

threshold is £54,000 before an IFA has to become VAT-registered.

Whatever route is chosen, IFAs on the whole remain pragmatic. Gillespie

says: “I cannot see a situation where it is an either or between fees and

commission. After all, choice is what independent financial advice is all

about and that includes how to pay for that advice.”

DOCE:

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