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Crisis, what commission

He says industry analyst Ned Cazalet, in his report Polly Put The Kettle On, have sparked a debate about the amounts that product providers are paying out to IFAs in up-front commission that is only serving to distract from the issues that life offices ought to be focusing on.

Gale tries to reassure IFAs by dismissing fears over the churning of new business figures as simply “a lot of hot air”.

He agrees that IFAs should be less reliant on up-front commission but says the majority of consumers do not want to pay fees and that many firms claiming to be fee-only are in fact just offsetting their commission against a fee. He also says he will not help bankroll any of his firm’s advisers in switching to a fee- based model.

Gale says: “I think the debate over commission is a lot of hot air. There is scientific research showing that the end client prefers to pay through up-front commission and so advisers are just behaving accordingly. Most firms that say they are fee-charging are actually offsetting their commission against the fees anyway. There are very few truly fee-only firms.”

Fee Based Solutions IFA Joseph Procopio says: “I think Gale is right. I would say that most fee-based advisers are offsetting. We are truly fee- based and I know of one or two others but they are few and far between.

“If you can move to a fee-based model then at least you know that you are in complete control of the monies you receive. I think claiming to be fee-based but not actually delivering is rife within the IFA world.”

But Syndaxi managing director Robert Reid says: “IFAs are all so different. Of course, in an ideal world, we would all be totally fee-based but that is just not realistic. The fact is that we do not have a choice, otherwise you end up cross-subsidising your clients.”

He does not think the current commission position is sustainable in the long-term, saying: “If someone is charging 1 per cent and paying out 5 per cent, surely that will not last.”

Cazalet Consulting principal Ned Cazalet, the author of the report that shook up the industry earlier this year with his revelations over product providers’ “new” business figures, which he claims give a false representation of the size of the industry as business figures are simply recycled, says there is definitely a commission crisis.

Cazalet says: “How can Patrick Gale say there is no crisis? If a product provider like Norwich Union can record 7bn year on year on new business acquisitions but half of that is paid out in commission to intermediaries, it looks to be massively loss-making.”

Some life offices have introduced a commission cap on their pension products, such as Aegon, which, although unlikely to solve the problem, at least it serves to mitigate the amount of risk to which they are exposed.

Scottish Life has introduced a financial adviser’s fee which it says acts as a halfway point between a fee and a commission payment.

Introducing a fixed fee gives Scottish Life a degree of certainty over the amount of remuneration being exchanged between IFAs and the life office.

Scottish Life group head of communications Alasdair Buchanan says: “There is a crisis. The approach some companies have taken on this – paying out large amounts of up-front commission in order to gain market share – is simply non-sustainable. No company can continue to lose the amount of money that is being lost.”

Cazalet says the current business models used by the likes of Norwich Union and Axa are unsustainable and it is impossible to gauge the extent of the loss.

NU sales director John Clougherty recently rejected accusations that the firm’s 20 per cent indemnity commission offer on new regular saving investment business was simply spreading high up-front commission from the life and pension market into investments.

He says many investors will get better advice from IFAs and will begin to save more regularly and the critics are biased against NU as it is such a dominant player in the market.

Clougherty says: “People will not like it because Norwich Union is a big firm. We have 10.5 million people who trust the NU brand. No one has to keep the 20 per cent. The IFA is entitled to come to an arrangement with the client and share some of the indemnity commission so this is simply another commission option. The existing commission structure will remain.”

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