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Generating fees from commission

There has been much said lately about fees and commission and the benefits or otherwise of each system of inter- mediary remuneration.

Some newspaper articles will lead you to think that fees can cut the cost of advice whereas basic maths will tell you that in many cases the opposite is true.

Others will tell you that commission is fine and that “good” IFAs rebate commissions to clients anyway so what is all the fuss about.

Well, I think the fuss is about perception in the main, pure and simple, and in the black-and-white world of the popular press it is fees that are good and commissions that are bad.

This leads me to believe that, in principle, fee payments to independent intermediaries are preferable to commission payments.

But, importantly, I believe the level of fees payable for financial advice should be agreed between financial advisers and their clients, not only when advisers chose to do this but every time advice is given.

Although product manufacturers need to facilitate fee arrangements for such financial advice, I believe they should not be able to impose restrictive remuneration systems on advisers.

However, and again importantly, I am also of the view that people should be given the option of generating fees to pay for advice from within financial products as a way of reducing the cost of advice.

There are good reasons why people would prefer to, or would be advised to, pay for financial advice from within a financial product rather than by paying a fee from other financial resources.

From my company&#39s experience of dealing with the financial welfare of customers across the whole spectrum of society, we are extremely concerned that a system that allowed only for fee payments for financial advice would be socially exclusive.

In our view, such a system would mean in practice that only the better-off would have access to financial advice.

Because of the way the UK tax system operates, people paying fees for financial advice may pay more than those who choose to pay their advi-sers through the commission system.

In particular, where pension products are used to generate commission payments, the tax savings available to individuals are substantial.A standard-rate taxpayer would pay half as much again for advice if payment were made by fee rather than commission and a higher-rate taxpayer would pay twice as much.

In a practical example,a higher-rate taxpayer who is advised to invest in an individual pension may owe a fee of, say, £200. In real life, how can he go about paying the £200 fee?

One way would be to go to his building society and draw the £200 from his savings and pay it to his adviser but he would have to draw an extra £35 from his savings account if his adviser is VAT-registered and pay that on to the Inland Revenue. So he could pay the £200 for the advice he has received by drawing £235 from his savings.

But in real life there is another way he can pay the £200 fee whereby he will not be liable for the £35 VAT and the Inland Revenue will also pay £80 of the fee for him.

This is achieved through a much misunderstood process called “commission”.

He could take £200 from his pension product through the commission system.

Commission can be thought of as a “fee-generator”in this respect. Where this is done, no VAT is due and, in this case, £35 would be saved immediately.

However, although a saving has been made, the pension product has been dam- aged to the tune of £200 in the process. So, what if this chap wants to repair the £200 damage to his pension, how can he do that?

Well, he could go to his building society and draw out £120 and pay it into his damaged pension as a single premium. If he does this, the Inland Revenue would become obliged to add a further £80 to his personal pension as tax relief, thus fully reinstating the personal pension to its previously undamaged state.

The end result in both cases is the same. The full fee has been paid to the adviser and the pension has been left unscathed.

The person being advised, therefore, has the option of raiding his savings of either £235 or £120 to achieve exactly the same result, the payment of £200 for the advice given.

It is for these reasons that, while supporting the principle of fees against commission payments, I would recommend that people should maintain the right to use their financial products to generate the fees needed to remunerate financial advisers.

In plain English I am saying that I am in favour of fees but do not want people to lose the substantial tax benefits contained in the existing commission system.

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