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INDEPENDENT VIEW

I recently wrote an Independent View piece in which I argued that it was not the case that IFAs were paid too much commission. I accept that issues like this are relative.

What really matters is that clients get value for money and recognise that this is the case.

An interesting article in the Money Mail pages of the Daily Mail launched an attack on the subject of renewal commission and pointed out to readers that they were probably paying renewal commission to the adviser who originally sold them their life insurance or personal pension plan, even though they no longer got service from that adviser.

Advice given to the reader was to “sack” the adviser and either appoint a new financial adviser or go to a discount broker who might rebate all or some of the renewal commission.

I cannot think of a strong argument against this article if you accept that the renewal commission is payable as a reward to the adviser for ongoing service to the client.

Either the adviser should provide service or, if he is not prepared to do so, he should return the commission to the product provider. Of course, that would only make sense if the rebate was applied to benefit the policyholder.

Where the adviser does add some value to the client, then it is perfectly sensible that the adviser is rewarded and ren ewal commission seems to be t
he most effective method of doing this. It does seem strange that there should be an attack on renewal commission but I suspect that this is of no great surprise as advisers being paid commission are a still a soft target as far as the press is concerned.

If you argue that renewal commission is a reward for selling the plan in the first place, then the argument put forward in the article falls down.

Usually, it is initial commission that is the target for attack and I believe often it is the level of commission which is the butt of the attack rather than the payment of commission itself.

There are some quite strong arguments for the payment of commission rather than fees and those have been well documented elsewhere. The argument is less successful where the level of commission is excessive and where it becomes so big that it introduces bias into the advice.

I do not subscribe to the view that commission itself brings about product bias. I know too many good IFAs who frequently recommend low or no commission products as part of the portfolio solution to their clients.

What the vast majority of clients do not probably see is the cost to the typical IFA firm of running his or her business. Again, it might be argued that this does not matter to the client because they are simply concerned with the cost to themselves and I have some sympathy with this argument.

But many of the costs are there for the protection of the client and we would be in a most unusual business indeed if those costs were not passed on to the client through our pricing policy.

I mention this because I have just had the pleasure of an annual audit review of my firm by my accountant.

If we were not a regulated firm we would escape the need for an audit by virtue of an exemption under the Companies Act regulations. We do not handle client money and we satisfy the financial strength requirements of our regulator and yet I still have to spend thousands of pounds on this audit. Should I pass this cost on to the client or bear it myself?

When you consider the cost to the typical IFA business of PI insurance, regulatory membership fees, the Investors Compensation Scheme levy and audit fees, it becomes pretty disingenuous for the press to attack commission levels. Sure, on a case by case basis, the levels may appear high but the reality is that they are not.

Once again, what matters is value for money. The IFA market is a highly competitive place, with great diversity among its members.

Some are cheaper than others and, for every independent adviser taking full commission, there will be one who engages in some form of commission rebating. It is up to each firm to determine its own pricing policy. What matters is whether the clients find the price acceptable.

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