Peter Hargreaves is managing director of Hargreaves Lansdown.
Let's just suppose we all become disillusioned with the investment industry. Well, it certainly has its share of frustrations and during the summer months, if we allow it to happen, business can be slow.
The economy is booming so why don't we go into the business of selling photocopiers? I bet we could persuade a manufacturer to allow us to sell their copiers and for our part we would just put a small two-inch advert in various journals saying we are selling copiers cheaper than anyone else.
We would explain to the manufacturer that we were not going to actually stock their goods and, heaven forbid, we do not want to employ service engineers even though we will still ask for the annual maintenance charge and we also intend selling every make of copier under the same terms.
The manufacturers will just supply from stock at their cost directly to the customer, sending our agents commission by post. Our unique selling point is that we will be the cheapest.
I suspect one or two manufacturers would be very brief and succinct in their response to such a worthwhile business venture. However, that is just the deal the investment industry offers to all the agents in the land.
Today, if you want to set up in the investment business (after you have jumped through all the compliance hoops), you can run a small advert in the paper indicating that you will sell every single investment product cheaper than everyone else.
You do not need to stock the product. Indeed, you do not even need to handle the cash or the paperwork. You only need to act as a postbox.
Advice – not on your life. Ongoing service – no way. Renewal – absolutely. Something goes wrong with the investment – churn and burn. More luscious commission to be discounted back to the client with a small cut in the middle.
Why is it every industry in the world has a standard rate of commission (or profit) for all the agents who have exactly this deal? No stock, no paperwork, no advice and no ongoing service. Yes, that standard rate of commission is 0 per cent. I shall repeat it in case you missed it. It is 0 per cent. For doing no work, carrying no stock, giving no advice and not providing any ongoing service. No commission. No service charge. So how does that affect us all in the investment industry?
Well, consider the next time a broker drives 50 miles to do a fact-find, drives 50 miles back, spends three days producing a report, drives 50 miles to present the report and then drives 50 miles back, makes a few amendments, several phone calls, etc, and does not get the business.
They might just reflect that a discount broker who did no work, provided no advice and will not even give any ongoing service might have run an advert which just caught the broker client's eye when, for the first time in his life, he read the personal financial columns of a national newspaper to see if any of the recommendations of the broker were mentioned in the paper.
The advert ran: “I can rebate on average 4 per cent commission.” On a £100,000 case, £4,000 is not to be sniffed at. This is why every broker in the land should be screaming from the rooftops that they will not deal with any company that offers standard commission to brokers who do not stock the product, offer no advice and no ongoing service.
The effect of rewarding all brokers equally rewards mediocrity. Oh and, of course, there is renewal commission – fund- based commission or whatever you want to call it. Isn't this for giving the client an ongoing service?
It is certainly not for rebating back to clients as a bribe to get clients to transfer agency even though people offering this bribe cannot possibly accurately account for it and probably have no intention of actually paying it.
But by the time the regulators stamp on it, it will be too late – the business will have been transferred. The next time anyone comes in from any investment group that rewards all its agents equally, pin them to the wall and tell them about the amount of business you are losing because of their policy of rewarding mediocrity.