As long as IFAs are paid by commission, there will always be a hint of suspicion, in some quarters, that product bias is in operation. In an ideal world this could be completely removed simply by all IFAs charging on a fee basis.
However, the real world is rarely an ideal one and if fees were the only option, it is quite clear that many consumers would simply not receive advice as they would be unwilling to pay an up-front fee.
This will increase the level of “financial exclusion” that the Government is so keen to avoid. I propose the following alternative.
Payment of commission to IFAs should be abolished. When advising clients, the IFA should charge a fee agreed between adviser and client
However, clients have the option of either paying the fee themselves or electing for the product provider to pay the equivalent fee to the IFA.
If the latter option is taken, the application form includes a declaration, signed by the client, specifying the agreed fee to be paid to the IFA.
The provider then applies an expense loading to the policy premium, just as they now do to cover commission payments.
The advantages of the above system can be summarised as follows:
As the fee is unrelated to any product purchased, product and provider bias would be eliminated.
Clients who were unable or unwilling to pay fees directly could elect for the cost to be deducted from the policy – as under the current commission system.
This would resolve the financial exclusion traditionally associated with fees.
Consumers would be easily able to compare the costs between different IFAs.
Such ease of comparison should produce a competitive downward pressure on costs.
Cost transparency would be achieved as clients would know exactly the cost of advice.
By the provision of two illustrations – one “clean” illustration (without the fee loading) and one which includes the fee – clients would also be easily able to identify the effect of the fee charged on their policy.