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Highest common factor

The industry may deny product bias but sales figures suggest otherwise

High commission has long been blamed for misselling but that has not stopped it from being paid. If anyone thought commission was on a downward trend, they would be disappointed. It seems that it is back with a vengeance.

Axa, Norwich Union and Prudential have introduced remuneration plans that allow advisers once again to charge high commission on certain products. Pru, for example, now has a pension paying up to 20 per cent up-front commission when the market norm is nearer 5 per cent and Norwich Union is paying 20 per cent on regular-premium collective investments.

Meanwhile, Scottish Widows is piloting a new Retirement Account Sipp that could earn a payment of up to 15 per cent when the product is launched early next year.

We can blame the return of high commission on a new remuneration system under which the adviser charges a fee but this is not paid by the customer writing a cheque – instead it is taken by way of commission from the policy recommended.

Insurers justify the new-style remuneration because it is “designed to help customers and their advisers build long-term relationships”. They claim that it enables customers to clearly see and value the advice they receive. Taking the fee out of a tax-exempt pension is also claimed to be highly tax-efficient as the adviser can be paid out of the gross payments. It is also argued that the customer has to authorise the payment and so is fully aware of what chunk of their investment is going into the adviser’s pocket.

Pru reckons the average commission paid to IFAs on its pension plan is around 4 per cent – nothing like the 20 per cent possible. It would not reveal how many advisers had taken the opportunity to charge the full whack.

But if Pru claims that most advisers opt for lower commission, why make the ceiling so high in the first place? At least Scottish Life, the first firm to introduce this new hybrid approach to fees, caps the amount it will pay to advisers at a more reasonable 7.5 per cent.

It is widely acknowledged that commission bias is prevalent within the industry. As I mentioned earlier this year, why else did sales of Norwich Union stakeholder pensions pick up markedly last year? Was the introduction of high commission a coincidence? I fear not.

Even the head of the Association of British Insurers, whose members depend on IFAs for their lifeblood, admitted at a recent Labour conference fringe event that commission does not always serve the consumer well.

Not that all IFAs should be tarred with the same brush – far from it. I am sure that many IFAs charge reasonable levels of commission. Rebating commission to the client is common while many will rightly argue that they earn and can therefore justify any commission paid to them.

But so long as such high levels of commission are being paid, the financial services industry will never rid itself of the stigma of product bias.

That thorn in the side of insurers (and IFAs, it would seem) Ned Cazalet has been banging on about churning for years. About half of new investments into single-premium personal pensions are simply money moving from one company to another, indicating high levels of recycling simply for the sake of earning commission, he says.

FSA chairman Sir Callum McCarthy certainly believes that some advisers push clients towards certain investment strategies and companies, not because they are in the best interests of the clients but because they will pay the highest commission. It is one of the reasons why the regulator is investigating commission as part of its treating customers fairly agenda.

McCarthy says so long as providers fight tooth and nail over offering enticing commission, a fundamental flaw in the adviser remuneration model remains. It is a prognosis I agree with. What’s more, it will also continue to gnaw away at the subconscious of people who refuse to believe that product bias does not exist.

Paul Farrow is money editor at the Sunday TelegraphMoney Marketing

50 Poland Street, London W1F 7AX

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