This whole fees verses commission debate is making my head spin.
Why do people think that previously dishonest and “income hungry” advisers will suddenly become any more trustworthy by charging fees? If you speak to any accountant or solicitor who is frank enough, they will confirm it is just as easy to over-charge clients with fees as it is by receiving commissions.
I can imagine the scenario in years to come. The fraudulent adviser will claim a piece of work took, say, 10 hours to do – whereas with the use of technology and efficiencies, it took two hours – but the time charged and the income received was based on 10 hours. It doesn't strike me as ethical or good value for money – and it can't be disproved either. So arguably you have a system that offers clients less value for money, is just as opaque, and because of its inherent complexity, open to abuse.
Of course, the dishonest element will always be there, and you can do nothing to stop it. Ironically, the more complicated you make something, the easier it is to be the victim of abuse. A bit like the hazardous waste analogy – complex, expensive and penal regulations for the disposal of toxic waste can bizarrely lead to an increase in illegal dumping. The same follows in the financial world. Make something so complicated and it only gives the corrupt more room to manoeuvre. And that can go for well-meaning investment companies who promote products that even they don't understand – split caps is a good example of that.
A recent meeting with a client further emphasised the belief that the more complicated something becomes, even trusted household brands start to push the envelope of credibility. Not naming names of course, our client had been advised by one of the top banks to do several quite sensible things; and then went on to ruin it by suggesting he start a stakeholder pension.
I wouldn't have minded but he already has a stakeholder pension with Standard Life (not through us, but from a previous employer) and a 15 per cent employer contribution going into a reduced commission occupational scheme.
Now you could argue it's our fault for missing an obvious trick here, which would be fair enough but what really should have happened was the bank should have said he was a lucky chap and if he really wanted to top up any funding shortfall, to go and do it through his employer's scheme – or indeed his existing stakeholder pension. After all, they had done pretty well out of the client up to that point.
Straight away, the bank saw the opportunity to sell a stakeholder pension to someone who didn't need it. By way of penance by proxy, I offered to switch his new stakeholder pension with the bank, free of charge to his own stakeholder pension.
Imagine what it's going to be like come April 2006 – the banks and other 'aggressive' sales advisers are going to be running around like dogs on heat selling 'top-ups' to all and sundry even if the employer scheme is what the 'prospect' should be concentrating on. Pension simplification will make it easier for the hard sellers to push a whole new range of plans.
And this is by no means a one off. The very same organisation has consistently shown itself to be the new foot-in-the-door guys – charging up-front and time-based fees, and retaining commission on top.
I have seen actual reports with exactly that, together with reams of print explaining what they will do for a client. You know the sort of thing. “In the appendix to the schedule will be found a description of the services provided by the company” – note that they don't say “ the services the company will provide” Perhaps I'm being a little nit picky here, but it smacks of small print tomfoolery; you should see the mightily impressive list of what they can do – but they won't, of course, and that has meant a new client for us who is fed up with the high charges and minimal input from the bank.
The trouble is they will fool some of the people all of the time. Our job must surely be to highlight, and benefit from, this sort of practice using our own small business model, which we all know to be better in the real world.
Tom Kean is compliance officer at The Analysts