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IFAs must face reality to survive

My word, what an angry lot IFAs can be when they see anything that threatens their int erests. I have been inundated with letters and phone calls – all from IFAs – because I had the temerity to suggest in my Sunday Telegraph column that commission ought to be phased out or abolished because most misselling could be laid at the door of the commission system.

“Until the Government deals with the fundamentals of these misselling disasters, nothing will change,” I wrote. “The root cause of most problems in the financial services market is commission, commission, commission. It distorts recommendations, enc ourages product providers to offer excessive remuneration to IFAs to the detriment of the investor and is totally anomalous in terms of the law of agency. Would you expect impartial advice from your accountant if he was on commission from the Inland Revenue? Clearly not.”

This is so blindingly obvious that I can&#39t think why so many IFAs disagree unless they simply do not want to face reality. Indeed, a couple of fee-charging professionals rang me up to congratulate me on the piece. There are good, honest IFAs around who give their clients genuinely impartial advice, frequently charging fees or rebating commission.

But there are still far too many who are influenced to recommend products with the highest commission.

What was behind the pension misselling scandal? Commission. What precipitated the current endowment scandal, where mortgage lenders were at one time pushing 85 per cent of all borrowers into endowment-linked homeloans? Commission.

At one point in the 1980s, Halifax accounted for over 85 per cent of all Standard Life&#39s endowment business. Why else would investors be advised to move from one life comp any to another to effect income drawdown when a Sipp is usually a better deal?

Here again, it was a fee-charging IFA who rang me up a couple of years ago to point out the huge commssion of up to 6 per cent that were being offered by some life companies for income-drawdown business. He was appalled.

I hardly need remind IFAs that it was Robert Bullivant, a highly respected member of the Chartered Insurance Institute, who stated clearly: “There is considerable commission bias for with-profits annuities and fund withdrawal.” You can&#39t get much plai ner than that.

Needless to say, large numbers of IFAs disagree. But they would, wouldn&#39t they? Most heaped personal abuse on my criticism of commission. But the only justification they could find for retaining the current system is that clients prefer commission to fees. If this is universally the case, how do fee-charging IFAs survive? Why do so many perfectly competent IFAs offer commission rebates or discounts?

Fortunately, the problem will probably resolve itself without direct Government intervention because, as Cap Gemini, Ernst & Young repor ted only last week, there is not enough profit in stakeholder pensions to allow fat up-front commission to be paid.

In addition, investors are unlikely to want to buy any life company product which has high charges built in, so the 1 per cent cap on stakeholder charges is likely to become the norm across the board on all products.

Whether IFAs like it or not, they will soon find themselves obliged to charge fees if they are to make any money at all. Consumers are much more aware of costs with the coming of stakeholder pensions and they are not going to put up with seeing their hard-earned savings disappearing in char ges and commission.

As the Cap Gemini report suggests, commission will be slashed across the board as soon as 2003 because life companies will not have the wherewithal to pay commission out of 1 per cent charges.

Even those life companies which were hoping to get round the problem by raiding the “orphan assets” are unlikely to get a
way with this manoeuvre now that the Consumers&#39 Association has taken up the case of Equity & Law policyholders.

Axa has virtually guaranteed a win for Equity & Law policyholders by arrogantly assuming that policyholders had no choice and offering them such a ludicrously low proportion of the assets.

Whatever is eventually decided, the Axa case will set the benchmark for all other companies hoping to use orphan assets to fund marketing costs and the industry will have the CA to contend with if anyone tries it on again.

If independent advisers do not prepare for the inevitable changes this will bring by switching to a fee-charging structure, then they will have only themselves to blame if they do not survive.

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