It may have escaped your not ice but Fidelity Invest ments is to cease paying ren ewal commission to discount houses which rebate part of it to their clients.
This move will be exceptionally popular with all hard-pressed IFAs struggling to give a proper service in the face of increasingly fierce and sometimes seemingly unfair competition.
done, Fidelity, on taking the lead. Let us give it our full support and encourage other providers to follow suit.
It should come as no surprise to any IFA that the world is often unfair, particularly following the enactment of the Financial Services Act 1986. Mind you, I have been around long enough to remember that the playing field did not seem particularly level before that time, either.
It is probably no exaggeration to say that commission is the most controversial aspect of providing independent financial advice. The industry was saddled with this form of remuneration from its earliest history and it continues to create great difficulties.
Many knowledgeable, unbia sed journalists claim that true independent advice can only ever be fee-based. Important Government bodies, such as the Office of Fair Trading, have also taken this view in recent times.
Sadly, some commentators seem to have taken an almost Orwellian stance – “Fees good commission bad.” This is at best oversimplistic and often simply wrong.
I am not against fees – we do much of our work on this basis – but a clear segment of the market prefers not to have to pay separately for advice.
Much has been written about the need to convince people of the justice of commission payments. If we have failed to get this message over to the press and public, then perhaps, at least, we can do so with the product providers.
Discount brokerages have a place in the market and the rebating of initial commission to clients who do not require advice is appropriate. What is far less acceptable is for product companies, which rely on advisory IFAs for the greater part of their business, to structure commission payments in such a way as to facilitate discounts. The prime example of this is renewal commission.
The whole justification for renewal payment is to reward the IFA for giving continuing advice. How then is it possible for a discount service operating on an execution-only basis to deserve this payment?
In itself, this commission has nurtured the growth of discount houses. They have been able to rebate the entire initial fee to clients and live – extrem ely well – off the payments made for the ongoing service they do not provide.
For discount firms to then start rebating this payment to clients is a nonsense and mer ely serves to help the press suggest that renewal commission is an extra wagon on the IFA gravy train.
This fiasco reached near epic proportions recently when one discount firm started to preach this very message to the financial press and to suggest that servicing commission was a rip-off from which it would protect the public.
I believe all product pro viders should follow Fidelity's lead and take a careful look at commission payments. There should be a portion of the initial fee that is payable for product establishment and which brokers have the option to discount to clients. I then feel there should be a second portion of the initial fee and ren ewal commission paid only to advisory IFAs to cover the very real cost of giving continuing advice. These payments should not be available on any plan established on an execution-only or direct-offer basis.
The whole subject of execu tion-only and direct-offer business is in itself something of an anomaly. Obviously, these routes should exist but should they be allowed in areas that clearly ought to be advisory?
Pension maturity is a good example of this. Some firms still offer execution-only purchase of annuities on the basis that the client understands the plan they require.
I would be amazed to find that more than one in 1,000 people understands the full range of guaranteed annuities, inves ted annuities, incomedrawdown and pha sed retirement plans – let alone the new plans from Canada Life et al. Surely, to allow clients to make this vital, non-reversible decision without advice is wrong?
To nip such problems in the bud, I feel it would be appropriate for there to be areas in which execution-only and dir ect-offer business are res tricted. For once, it would be good to see our industry trying to prevent misselling in advance rather than suffer poor publicity and have to put things right at great expense after the horse has bolted.
Philip Rose is managing director of Wentworth Rose