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Nic Cicutti: Return to commission would be retrograde step

Nic Cicutti

Unlike some of my colleagues in personal finance journalism, for whom the term itself ranks as one of the filthiest in the English language, I have always had a slightly ambivalent view about advisers being paid commission for the work they do.

Maybe it is because I have spent almost 25 years covering the financial services industry and have known enough advisers personally to know they would never be influenced in their recommendations by what they might earn from them.

My first IFA, shortly after I started at Money Marketing in the early 1990s, was like that. He was chaotic and disorganised at times, but I do not believe for a nanosecond he was remotely biased in his advice to me by the product commission amounts he might earn.

Perhaps it is also the fact that I, too, have worked on commission. During the mid-1970s, while in my late teens, I took a job as a guide in Italy, escorting groups of holidaymakers, mostly Americans, as they travelled around the country with me and a driver as escorts.

Many of these tourists were of Italian descent, returning to visit the “old country” their parents or grandparents had emigrated from one or two generations earlier.

Our basic pay was awful, barely £6 plus food and bed for a day that started at 8am and could continue until midnight, when the last traveller went to bed and we could then do the same.

What made the work attractive financially were the tips at the end of the trip – plus the commission, up to 20 per cent on sales of all sorts of items, from jewellery to books, leather goods and even furniture our tourists bought at the various shops we stopped at during the day.

The amount we earned in commission was worth anything up to 10 times what we were paid by our employer. And some of the stuff our holidaymakers were buying was, frankly, expensive tourist tat.

From my personal perspective, there was no “bias”: no matter what the customer bought, I still got my 20 per cent. If he left the shop and went elsewhere he would pay much the same for his table: every local business had its small team of commission-hungry tourist guides paying them a visit with punters in tow, so prices were surprisingly stable – and high.

Despite my ambivalence on the subject, which I have expressed more than once in Money Marketing, I have strong reservations about the prospect of a return to some form of sales commission for advisers, as expressed recently by FCA interim chief Tracey McDermott in an interview with fellow columnist Paul Lewis.

It has to be said I am not remotely surprised by this move. I argued months ago the Financial Advice Market Review was a creature of the banks and big insurers who have lobbied for it in order to boost sales at the expense of consumer interests.

And so it has come to pass.

The problem, it seems to me, is that commission is so outdated and 20th Century. Once upon a time it might have been the dominant form of remuneration across the industry, with clients mostly failing to understand the advice they were receiving was not “free” but was being paid for via their premiums.

But today all that has changed and advisers have, in the overwhelming majority, moved on. Since the RDR there is greater awareness of how commission works and most consumers, given a choice in a way they could understand, would opt for fees if they are given the chance.

Moreover, though some advisers might hate to admit it, the move to a predominantly fee-based form of payment for their services has been good for them too.

In the past two or three years many have taken significant steps forward in terms of being able to persuade their existing clients about fee-based services.

Sure, we have not yet reached the stage where, for most, what is being sold is advice and not the product. Yet there is some recognition that this is the direction of travel for advisers. It may be five years down the line but it is certainly on the horizon.

By contrast, returning to commission-based remuneration is not just the lazy way out of doing business, it is also a retrograde step.

Ironically, the only sections of the industry really desperate to see commission making a comeback are not advisers, who are adjusting to the new environment.

It is banks looking to rebuild a market for their services by using less-qualified salespeople to punt basic products to their large customer bases, the equivalent of shooting fish in a barrel.

If they get what they want from the FAMR they will re-infect an industry that has, even if unwillingly and without great enthusiasm, taken important steps to clean itself up, and those who benefit from the move will not be advisers, even if some are rubbing their hands at the prospect.

While the majority of advisers will be unaffected in terms of how they work, a return to commission will reinforce a climate where mistrust is the dominant feeling consumers have about the industry.

Are a few commission cheques for a tiny minority not employed directly by banks or insurers really worth it?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. I disagree. No one’s advocating a return to the bad old days of capital units and early exit charges (or, if anyone is, they must be crazy). Commission ~ as an option ~ in the form of (effectively) indemnified adviser charging, facilitated by (only moderately) reduced allocation of the first 2 years contributions would be clear, workable and would quite legitimately get round the problem of unaffordable upfront fees. It’s about customer choice.

  2. I don’t like it either and largely agree with Nic. On the other hand, what is the fundamental difference between commission and customer agreed remuneration (Car)? If the client knows what the ‘commission’ is and agrees to continue then it ceases to be commission and becomes CAR doesn’t it? You could argue that commission is set by the provider (though advisers have always been able to adjust this) and CAR is set by the adviser – but that’s just semantics. The method of payment is really a separate issue though commission was easier and more convenient. Purists might argue it hid the costs but given CAR is expressed in the same way these days that’s a limp argument.

    SJP recognised this nonsense early on, called the bluff and simply carried on doing what they always did with a few tweaks to wording. Let’s face it, if they were wrong they would have been forced to change by now.

    What the RDR did was change the mind-set and focus of advisers. Clients now had to pay for the work done and the risks taken by the adviser, ergo, don’t bother with clients who can’t pay these high costs, largely incurred as a result of oppressive regulation.

    Bringing back commission will require changes to regulation, including suitability requirements. The devil is in the detail. Will suitability be watered down for commission products? What if a commission product is cheaper than a CAR recommendation (and when would that be apparent, after the fee is agreed, then what?)? If advising on commission products would you be able to automatically exclude consideration of non-commission products even if you knew there was something better? Are you automatically a restricted adviser if you offer this service (in which case IFAs won’t participate)? It doesn’t take much imagination to come up with many other scenarios. What will the unintended consequences be for this grand plan…

  3. For a moment i thought Id be saying something I never dreamed id ever say – “well done Nic, Great Article totally agree” Then I read the last few paragraphs !
    Obviously Nick dosnt read comments to his articles , if he did he would have given alternatives to commission to bridge the advice gap in his previous peice on this subject and this one – in both cases he hasnt. Advice on Regular premium Pension’s, Regular Premium Isa’s and other regular savings,and advice for the less well off is virtually non existant. until commission is reintroduced on a level charging basis or factoring is allowed these area’s will continue to be non advised – We did point this out before RDR but it fell on deaf ears l, including Nic’s!!

  4. So when the wires started buzzing with Tracey’s ‘heads up’ on a regulatory navigational shift of “so I wouldn’t rule out that there may be some element of commission, but we are not going to reverse the RDR” I headed to a dark room for an hour and undertook some deep breathing exercises.

    Hector Sants stated at the FSA AGM in June 2010 that the RDR cost would be £430m!

    In 2014 Mark Garnier MP said the new RDR rules, which he estimated had cost in the region of £3bn at that time, “had resulted in far fewer advisers servicing a more limited demographic of clients, with less incentive to innovate”.

    Later that year it was reported that RDR costs were heading toward £6bn and it is no doubt now well in excess of that. In real terms that could represent three new runways at Heathrow or one at Gatwick.

    If Sants and the regulator were builders doing your house extension (or digging out a basement if you live in London) a few questions may be asked about the estimation process?

    Panacea was among the over 290 parties to give oral evidence to the FAMR in November 2015.

    Amazingly it quickly became clear that there was a considerable lack of understanding around many issues of IFA RDR concern. I think this is because there was a systemic failure to fully grasp how intermediated distribution works and why.

    This failure to understand has been caused by a complete reluctance on the part of the current regulator, past regulators, consumer groups and the Treasury to ever listen. The whole RDR thing was bulldozed through, wheat and chaff together.

    We advised the FAMR that commission was not a bad thing if fully disclosed and excesses managed.

    Why? Because savings products are rarely bought by the mass market needing selling, something the ‘man from the Pru’ understood in the 1950’s and 60’s.

    The Maximum Commission Agreement (MCA) during the 1980s was a perfect way to control bias by commission amount, that was until the Office of Fair Trading perversely objected. Using an unresolved conflict in government policy between investor protection and the belief in unrestricted competition they had it removed.

    That simple removal led to the huge commission override payments being made and the arrival of product or manufacturer bias and miss-selling, especially by the banks.

    As the late satirist Peter Cook in his 1970’s ‘Clive’ persona might have said “is this any way to run a ******* ballroom’.

  5. As ever some of the main points have yet again been missed. Commission or even CAR is dependent on someone buying a product. This is flogging, not advice. When you provide advice the client pays whether or not they buy a product. If you employ a lawyer and lose your case, you still pay and often pay the winners legal costs as well.

    Commission makes you the agent of the provider, not the client. CAR is a little better in this respect. However both commission and CAR reduce the value of the product. For example take the commission payable on a £100k life cover over (say) 25 years. How much does that pay out now? (No longer being regulated I can’t access quote portals). More than £500 I would warrant. That’s what I used to charge for this size – irrespective of age. Then look at what you would save on premium for a no commission deal. Multiply that monthly saving by the term and the result is a no-brainer. Furthermore if the client is so unfortunate as to be rated, why should the adviser then trouser and higher amount of commission – unless he re-brokes.

    Then what about those who are restricted or tied to those firms who generally pay higher rates of commission (not to mention those who may be influenced!).

    Yes, I know that commission is still permitted on life products – a ridiculous and illogical omission, but the principle is the same across the board.

    As I have said previously in relation to this (plagiarising Dr Johnson). In the 21st Century, ‘Commission is the last refuge of a scoundrel’.

    • I think the notion may be that it heralds a return to the era of cross subsidies Harry. One advised the masses, knowing that many cannot and will not pay a fee worth the time involved, but every so often there will be one who needs a product and the commission receivable will no doubt more than reflect time spent… Bit like the old days dare I say it! The numbers game!!

  6. Trevor Harrington 21st January 2016 at 3:57 pm

    One of the biggest problems with commission was the variable amounts paid by different products, thus engendering the thought that a salesman might sell one product with a higher commission, in preference to another.

    Another problem with commission was that it was used on indemnity terms, meaning that the client, suffered a deduction of value if/when he decided to cease the contract some years later.

    The third problem with commission was that the adviser’s company usually kept the renewal or ongoing commission amounts for themselves, and certainly did not allow it to be passed onto an adviser who was working with the client even if that adviser was within their own company, and certainly not to another adviser who was working outside of their own company.

    The result of the three above issues was that there was little or no motivation for the adviser to stay in touch with the client and see them regularly over the years ahead, unless they thought it likely that they might be able to sell another product, very possibly in replacement for the original one, and earn all over again.

    The solution :-
    1) Maximise the commission at perhaps 3% of the investment premium, to be paid only when the premium is paid by the client (no indemnity terms).
    2) Maximise the ongoing renewal / trail at perhaps 0.5%pa of funds accumulated under management.
    3) Make it compulsory that the adviser actually dealing with the client must have at least 50% of the above figures credited to him/her.
    4) Make it compulsory that the client can change his adviser at will, and redirect the above commission figures to his/her new adviser.

    I built a company on these principals from 1990 through to 2008 – culminating in eight established advisers, and four oncoming advisers, across three in-house branches – it was very successful. Advisers were highly motivated by these principals to secure clients, retain clients, and see clients regularly through an automatic recall system, They retained the clients with their existing products, and built their renewal/trail stream over several years. They secured over 50% to 65% of their personal salaries through renewal/trail, and they worked with up to 250 / 300 clients each. The established adviser salaries varied between £50,000pa and £150,000pa. We had no complaints from clients over 18 years. The business was eventually sold with over £400,000 per year renewal/trail.

    sorry … what was the question again ?

  7. Good article and reflects my views fully. Why do we need and alternative?

    You can currently spread the cost of advice within a product via a trail fee and all that is needed is agreement that initial advice could be paid for over a 12 or 24 month period.

    The comments made about the banks is in my opinion smack on and the FCA not completing its review in to banking culture to my mind supports these statements.

    “It is banks looking to rebuild a market for their services by using less-qualified salespeople to punt basic products to their large customer bases, the equivalent of shooting fish in a barrel”.

  8. This observation from 2010 may be of interest on the subject of ‘is commission an “rdr” dirty word’?

    http://www.panaceaadviser.com/main/st3976.htm

    Almost 6 years have passed, who are the winners and losers now?

    • Derek The winners are those firms who got themselves well qualified, understood that they run a business and not a charity and had the ability to understand and apply marketing.

      The losers are those who want to live in the past, rebel against higher qualifications, don’t know a whole lot about marketing and confuse being in business with social work. They also are far more concerned with objecting to regulation instead of just getting on with it and working to the best of their ability within the constraints.

      Does that answer your question?

      • Isn’t it really about clients in the end? Most IFAs have benefited from RDR but that’s not the issue here. There is now a vast swathe of middle to lower income people not getting any help. The voices are largely from those who give a damn, not from a selfish perspective, but because it matters more generally.

  9. Trevor Harrington 21st January 2016 at 10:22 pm

    @ evening Harry –

    Hourly fees are the single biggest likely source for a mis-selling scandal in our profession today. Rarely in the last 34 years have I seen such a glaring opportunity for the criminally minded adviser to rip-off his/her clients, and with virtual impunity for doing so. It sort of reminds me of all those conmen builders and roofers that you see on TV, who charge little old ladies thousands of £s for repairing a loose slate on the roof, or mending a dripping tap.

    Qualifications are an irrelevance, if you are suggesting that this might eliminate criminality.

    May I request that you open your mind to those clients who could not afford your service, and those clients who did not want to subject themselves to an open ended charge which could cost them a hugely inappropriate and disproportionate amount – called a fee.

    We need to be able to accommodate clients who might desire all sorts of different payment systems, without working at detriment to their investment beyond an acceptable amount.

    Humans are what we are, and therefore we also need to motivate our advisers, and reward them for doing the correct thing, whilst using their remuneration as a self regulating package as far as is humanly possible.

    By definition, fees cannot do that, but properly regulated, and openly declared, commissions most certainly can – and their lies the challenge, not the sterile debate over fees Vs commissions, one in exclusion to the other.

  10. Personally I couldn’t care a jot, what a remuneration package is dressed up as (commission, fee retainer etc etc ) but I do care about disclosure, any potential investor AND adviser must know the costs, so one can they really establish value for money !

    I recently needed a new watch….. didn’t have enough for a Omega, but I did have enough for a half decent Tag, good value for money ….. I have a young client who wants to start a modest regular premium (decent) pension but cant afford the fee ! the good news is he has got an extra £150 to spend in the pub a month !

    I stopped taking commission in 2007 for two reasons (its worth noting at this point I still took it on regular premium stuff on those that couldn’t afford the up front fee) firstly, because you could never actually explain it, and give your client a definitive answer as to the true costs and more importantly who got what ! secondly, (and the most important) it never really added any value to my business, I knew lots of fellow IFA,s who one month had an expensive holiday and the next couldn’t afford to eat, and yes this yoyo effect used to happen to me too, this.. is the dangerous part, and the main driver for people “having to sell” and IMHO leads to miss selling, the whole bias argument is rubbish !!

  11. For me, an interesting aspect of these comments so far has been the opposing opinions of ‘Harry Katz v Trevor Harrington’. I am on Trevor’s side. When I read Harry’s comments, I think of a Downton Abbey character who wouldn’t deal with those ‘below stairs’ because they could not afford to pay his fee. I would never question or suggest that the fee wasn’t excellent value for money – I have no doubt that it was. And, I understand the effort that went into achieving the professional qualifications to allow the job to be done in the first place. It’s simply the notion that ‘if you cannot afford my fee, I have no interest in dealing with you’. Whereas in Trevor Harrington I have an image of an adviser dealing with all people regardless of how well off they are. If the client can, and wants to pay by fee, that’s fine. If the client can’t, or simply doesn’t want to pay by fee directly but would rather have the provider pay it by way of an increased amc, that’s also fine. I could of course be completely wrong and gentlemen, please feel to correct me if I am.

  12. Tom Ward ~ a very sensible post. If someone who wants to embark on a regular savings PP with a budget of only £100 p.m. and who simply doesn’t have the means to pay a relatively large fee on top, an indemnified adviser charge recoverable by reduced allocation of his first two years contributions is pretty much the only alternative to doing nothing.

    The fee-only zealots really should try to see the wider canvas.

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