Commission has traditionally been the way that salespeople are
remunerated, wher-eas fees are paid to professionals such as lawyers and
IFAs, in the public's eye, seem to straddle a position between being
salespeople and professionals. But scrutiny on commission is likely to
intensify with the son of Myners' review under Ron Sandler and the FSA's
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
On the other hand, Kangley Financial Planning managing director Geoff
Kangley's 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's 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
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.”