If advisers are paid too much in commission, at least it is not at the expense of the client.
Are IFAs paid too much commission? This might seem a contentious question at the best of times but there does seem to be a focus on the subject (yet again).
A recent Radio 4 consumer programme took an ex-adviser on a series of interviews to prove the contention that “commission is much higher today than it was in my day”.
Of course, no mention was made of the fact that there was no such thing as commission disclosure “in my day” nor the enormous extra cost of being an adviser today.
But where high commission results in poor value to the consumer, it is wholly appropriate for it to be debated.
It has been my experience, and I am sure the experience of other IFAs, that, on the whole, commission tends not to be too high.
Sure, on a case by case basis, there are some strange anomalies but they can be dealt with. For example, on a single- contribution investment into a personal pension plan, why is it that the amount of commission payable is 10 times greater for a £10,000 contribution than it is for a £1,000 payment?
The amount of work involved in advising the client is certainly not 10 times greater. Of course, this is very much the argument put forward by fee-based advisers. Charge each client for the cost of the advice and recommendations to them, no element of cross-subsidy.
In some respects, high levels of commission can be quite beneficial to the client. IFAs who reinvest commission into the plan – I have never been a big fan of rebating directly to the consumer in cash – will tell you how they can effectively eliminate entry costs on products such as insurance bonds.
The commission reinvested resulting in an enhanced allocation rate typically wipes out the bid/offer spread. It is not always necessary to reinvest all the commission to do this, so the adviser can still get paid without the client having to write out a fee cheque.
Incidentally, I am a strong believer in the fact that it is up to each IFA firm to determine its own pricing policy, which consumers will either accept or reject, and there is no criticism from me of an adviser taking full commission. That is between them and their client.
I do not have an axe to grind about fees or commission – we operate on both bases. For some people, fees are the right approach and for others commission works well – for both consumer and adviser.
What really matters is the relationships between char-ges/commission. Do rem-ember it is not charges and commission. Commission is part of the product charge.
I am intrigued by the effect Catmarking is having on this subject. Stakeholder pensions are not turning out to be quite the threat I first envisaged they would be. The reason for this is that a 1 per cent Catmarked product throwing up a 1.1 per cent reduction in yield plan is often more expensive, yes, read that again, more expensive, than a personal pension plan, where an element of commission has been reinvested to reduce the effect of charges.
So a policy fee of a couple of pounds a month, a reduced allocation of, say, 98 per cent and a 5 per cent bid/offer spread coupled with a less than 1 per cent annual management charge is not the ogre that many commentators think.
The IFA gets paid a reasonable level of commission to promote the product. OK, not quite so much as used to be the case.
The beauty of the new product range 1 per cent annual management charge is that the link between commission and product value for money is being broken.
A key features document I have in front of me shows total client contributions in year one of £4,500, total charges in year one of £25 and commission payable in year one of £506.28. The transfer value at the end of year one is £4,640. You explain it to the client because I certainly can't. Are IFAs paid too much? Not at the expense of the client they are not.
Nick Bamford is managing director of Informed Choice