The flip side of commission: Debate rages over risks of consumer detriment

Radical plans to re-introduce commission have split the industry as the FCA grapples with the question of how to encourage advisers to serve the mass market.

Earlier this month, Money Marketing revealed the Financial Advice Market Review panel is considering a proposal to allow providers to pay commission to advisers, subject to strict safeguards to protect consumers.

FCA acting chief executive Tracey McDermott subsequently refused to rule out a return to commission in an interview on BBC Radio 4’s Money Box. The issue has predictably sparked fierce debate, with some arguing it would be a dangerous, retrograde step and others suggesting it could hold the key to bridging the advice gap.

So, three years on from the RDR, can commission be brought back to life without encouraging mass misselling? Will Chancellor George Osborne have the stomach to introduce a reform likely to be trashed by the consumer press?

And what alternatives should policymakers consider to incentivise advisers to service lower wealth clients?

Incentives

Old Mutual Wealth has outlined a structure within which it believes commission could be paid by providers to advisers without incentivising poor practice.

The model would only allow commission on basic accumulation products. Provider payments would be standardised so advisers are not tempted to choose products for clients based on the rate they will receive.

And the existence of commission would need to be declared upfront and in pounds and pence to clients.

Old Mutual Wealth customer dir-ector Carlton Hood says: “Whenever you mention commission it sounds like a bad thing but you have to put it into the context of what the FAMR is trying to achieve. One of its focuses is to say if you have people with less than £50,000 they are unlikely to want to pay the kind of fees being charged in the market today.

“We’ve been thinking about whether there’s a way for providers to fund advice that isn’t the old style of commission. We’re looking at more of a flat fee, with no competition between products, and it would allow people to access human contact and the right kind of guidance they need.

“We’re trying to overcome inertia and economics. In the former, it’s clients making the first move to seek advice. When there was commission advisers were reaching out and making contact but the market of advisers has shrunk and demand has risen.”

Hood also argues the scale of providers means they could spread commission payments over a longer period.

He says: “While it might be sensible to pay for advice, consumers find it hard to pay that upfront cost out of their pocket, they are looking for a way to spread it. Providers have the economic means to spread it but we have to avoid the evils of commission.”

SimplyBiz joint managing director Matt Timmins says banks and building societies will only return to the mass market if they can charge commission.

He says: “The RDR tried to create a purist environment where everything is done very transparently, which is a good aim. The problem is you end up killing the patient with the medicine. We have reached a point where most people on middle income and below don’t believe they can afford to pay for advice.

“Commission has a place. It should be transparent and it should be disclosed in pounds and pence.

“It also helps alter the mindset of the adviser to go out and try to win business, rather than waiting for the next client to walk through the door.”

He adds: “The only way to solve the issue of access to advice is to bring back the banks and building societies. To do that we need a simpler advice regime and the ability to be remunerated by commission.

“That will be good for the general public and it will be good for advisers too.”

Building societies have indicated they could back the reintroduction of commission.

Building Societies Association head of savings policy Brian Morris says: “It is appropriate that alternatives to current arrangements for paying for advice are considered [as part of the FAMR], in light of experience of the RDR. If the authorities were to recommend a return to some form of commission, we would certainly look at that but would want to be convinced it worked for building society customers.”

‘Retrograde step’

However, others believe the return of commission would increase the risk of consumers being sold inappropriate products by advisers.

Fairer Finance founder James Daley says: “I just can’t understand why we would want to go back to a world where people are being incentivised effectively by the provider to sell products. It’s that relationship where an adviser decides they are going to choose a product because the provider pays a certain amount of commission that creates all the wrong outcomes for consumers.

“The problem in a tiered system is that different types of products will pay different levels of remuneration. You have the problem of advisers being tempted to go down one route because it’s more attractive than another.”

Syndaxi Chartered Financial Planners managing director Robert Reid says reintroducing commission would be a “massive retrograde step” and urges policymakers to instead focus on improving financial education. He says: “The only reason people want a return to taking secret commission is because they cannot justify charging a fee. It is completely the wrong direction for the industry to be going in and I do not think Tracey McDermott or the FCA want to do that either.

“The problem with this solution is it assumes people with little money don’t have complex decisions to make. The issue of suitability doesn’t go away just because someone isn’t putting a lot of money away, if anything it becomes more intense.”

Apfa director general Chris Hannant says the impact reintroducing commission could have on the perception of the industry is also a worry.

He says: “Some of our members are concerned about potential reputational damage, although with appropriate safeguards that could be addressed. We would also want to maintain a level playing field. If it is perceived that one way is free while the other involves a fee, there is a risk the market will be skewed.”

Political will

Even if the Government and the FCA back the practical argument behind allowing a scaled-back version of commission, Osborne may not want to risk the wrath of the consumer media.

In his column for Money Marketing last week, Money Box presenter Paul Lewis said he was “shocked” at the proposal and described commission as “the cancer at the heart of the financial services industry”.

He said: “If the person sitting opposite me labelled ‘adviser’ has a financial interest in the choice I make, then that is a conflict of interest. I can never trust the advice I am given because I do not know whose interest is being promoted by the recommendation they make.”

Fellow MM columnist Nic Cicutti has also rubbished the idea.

However, Cicero executive chairman Iain Anderson argues the Conservatives may have an appetite for reform if it can be proved commission can boost access to advice.

He says: “Politically a move back to something called commission will be very difficult to do. However there is an increasing emphasis on a ‘what works’ approach to policymaking under this Government. Just as there has been seen to be a new settlement with the City since the general election, there is room for a new settlement with advisers.”

Alternatives

Given the level of reaction to the idea of reinstating commission you could be forgiven for believing it was the only reform idea on the table.

However, the FAMR is looking at a variety of options, including stripping back regulation, lowering qualifications and introducing a time limit on advice liabilities.

The Financial Services Compensation Scheme Levy also weighs heavily on advisers, with total costs hitting £363m for 2015/16.

Investment advisers will face a £108m levy this year, while life and pensions advisers will pay £80m, the FSCS estimates.

The FCA is set to review the FSCS, including the way the levy is structured, once the FAMR has concluded. The FAMR recommendations are due to be published ahead of the March Budget.

Hannant says: “People getting full advice is the best option and anything that can be done to reduce the cost of that will help. A long-stop would address some of the uncertainties around liabilities and encourage investment in the industry.

“And when you look at the FSCS levy, about two-thirds is coming from investment or life and pensions intermediaries for 2015/16. Where is the balance and proportionality in that?”

Adviser views

Chris Budd, managing director, Ovation Finance

When I started  in 1998 I was embarrassed to call myself a financial adviser entirely  because of commission. Having said that, there would be a lot of people without life assurance if it was not for those commission-based salesmen, so I am all for a return to commission provided it is done in a controlled way. It was the excesses of commission that caused the problems, not commission itself.

Alistair Cunningham, director, Wingate Financial Planning

I am anti-commission and if you look to reintroduce it in the way that is being discussed,  there is more risk of consumer detriment. In fact the FCA should be going the other way and looking to ban the charging structures that are commission by another name. Vertically integrated firms still operate a commission-based structure for all intents and purposes, and for them it is business as usual.

Head-to-head – should the FCA reintroduce commission?

For

Kevin-Carr-whitebg-700.jpgKevin Carr, managing director, The Protection Review

I remember sitting in a meeting a decade or so ago with several ministers and trade bodies when the as yet unlaunched Pension Term Assurance was being discussed.

Those representing the adviser community pointed out the biggest impact would likely be people switching their life cover to save money, which was contrary to the preferred view from Government that the money would go into pension pots instead.

When the product was pulled, less than a year after it started, some were apparently surprised the money did not end up going into pension pots.

A sledgehammer to miss a nut, as the RDR was once described. But it depends which nut you are trying to crack. If mass consumer access to financial advice was the aim, the RDR was never going to work. And the Government and the regulator knew that too.

Over the years various people have come up with a myriad of reasons why commission serves the protection-buying consumer well. The present model is not perfect, but overall it is much better than the alternative.

Protection remains a largely event-driven purchase, which means people do not tend to wake up and buy some for fun. It tends to be driven by key life events when finances are tight.

If the overall outcome for consumers is more important than how we get there, let us be open to the option because it is possible commission in some form needs to exist in order for advice to reach certain aspects of society.

Whether or not post-RDR advisers want to deal with the mass market is another matter,  but restoring an appropriate commission structure in the right areas could help.

Against

James_Daley_Fairer_Finance_2014James Daley, managing director, Fairer Finance

We want more people to get advice but it is bogus to think the only way to get there is for providers to start making payments to the advice market again.

Adviser charging is the compromise that moves us in the right direction.

It removes the incentives that have driven bad behaviour in the industry in the past, as well as providing transparency.

I just cannot understand why we would want to go back to a world where people are being incentivised effectively by the provider to sell products.

It is that relationship where an adviser decides they are going to choose a product because the provider pays a certain amount of commission that creates all the wrong outcomes for consumers.

The problem in a tiered system is different types of products will pay different levels of remuneration.

You do have the problem of advisers being tempted to go down one route because it is more attractive than another.

We are only three years into the RDR experiment and already we are looking at scrapping it. We need to find ways of getting help to consumers, but this is entirely the wrong way to approach it.

This is not about remuneration. I get the feeling that providers and advisers who are engaged in this review are seeing this as an opportunity to get commission back on the table because it could end up being more lucrative, it is not the consumer interest that is at the heart of this idea.

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. Weird…4 years ago most advisers were lamenting the death of commission and dreading the introduction of fees suggesting the change would create problems…and it did…but now those same ones are fearing its possible return in some form almost as if its managed by the mafia…

  2. Strange, its nearly always the people who can afford to pay for advise who always have the strongest argument against commission. And, for the record I never ever sold a case based on what commission I was paid. However, I’m not naive and fully understand we can’t go back to where we were but if something is broken they have to look for a fix and RDR was broken before it was even implemented.

  3. Paul
    You talk about earning money by advising the client what to buy!
    Hypocrisy!
    What do fee charging advisers get for their advice, sorry, guidance!!!!
    What does the client get?
    A product in any other term!!!!

  4. Why is it that people cannot see the problem is not one of commission but of ethics?

    Personally, I want the banks to come back, as I do the ‘Man from the Pru’. Not enough protection is being bought, not enough retirement planning is being considered.

    Are the banks good at this? Not really, it is always better for a consumer to see a whole of market adviser but historically banks have acted as a conduit whereby having introduced a consumer to the concept of advice the consumer moves on to a WOM adviser.

    It is always the same set of moaners and groaners who see a problem with commission yet apparently cannot see the various gaps that are widening by the minute

  5. Firstly, as all too many seem to be assuming, no one’s advocating a return to the bad old days of capital unit contracts (and early exit charges) on regular contribution contracts. That would be a retrograde step.

    Secondly, isn’t enabling people to meet the costs of advice and implementation by way of them being recovered from the contract itself (probably by way of a not too severely reduced rate of allocation over the first 2 years), as opposed to them having to write a cheque, surely a matter of offering consumers a choice? Provided the amounts are the same, where’s the problem? My advice and implementation fee, Mr Client, will be £500. What’s your payment preference? Most clients, I suspect, would choose the commission option ~ and that’s all it would be, an option. Those who prefer to pay a separate fee would still be entirely free to do so. In fact, it’s quite possible that clients NOT offered the option of commission would walk away and seek out an adviser who does.

    I really don’t understand why some people are so intent upon sitting astride their high horse and dismissing out of hand the idea of offering consumers a choice.

  6. “Commission has a place. It should be transparent and it should be disclosed in pounds and pence.”

    But didn’t it always.. nothing new there… so whats that revelation about? Whenever I transacted biz on a commission basis, the (mandatory) client illustration ALWAYS disclosed the Commission paid and the accompanying (mandatory) Client Research Documents showed the comparable commission offered by other providers. That was part of the compliant (sales /advice) process. So comments like ” it should transparent and disclosed in pounds and pence” seems to allude that prior to RDR it was never disclosed. Maybe I was just ahead of my time…

  7. At the risk of sounding like a broken record – the muted return of commission does not prevent anyone charging fees and being a wealth manager and having as many ‘qualifications’ as they (or their client’s) like – never did never will .

    In a free market there is room for both and ultimately the market not the regulator will decide which works for the client – that’s the way normal unfettered markets work PEOPLE decide.

    Why are so many frightened of a return of commission – it is merely a choice and if clients decide to go to a bank (or SJP more proof today of their success) or prefer to pay a fee that’s their decision – there are a few who appear to be either too pompous or actually are frightened of playing in a free unfettered market bound by commercial not regulatory decisions.

  8. Well if Paul “The FTSE 100 had a less than even chance of beating a five-year cash bond over the last 25 years” Lewis and Nic Cicutti are against reintroducing commission, clearly it’s a terrible idea.

  9. Trevor Harrington 21st January 2016 at 1:29 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 ?

  10. If the banks and building societies are in favour that implies clients aren’t willing to pay for the service they intend to provide unless the cost is made less transparent, is spread over the life of a contract and the client is less clear on the actual cost of that advice.

    So do we change the rules so that clients can make decisions without the full facts being made clear? I suspect not.

    Perhaps what’s happened is that the ‘mass market’ have realised that the cost of the advice isn’t value for money and the advice market / consumer uptake reflects that. Also remember, there’s a world of information out there at the click of a button. Perhaps there is less advice being given simply because less advice is needed?

    Do we therefore falsify this position by re-engineering the status quo so that ‘free advice’ is being given again?

  11. When will this industry and its journalists stop referring to ‘The Advice Gap’ Even the FCA Consumer panel doubts its existence. At best this is ‘non proven’.

    So logically if the so called Advice Gap is in doubt, the commission is not a solution to a problem which may not exist.

    If life offices are concerned with falling business perhaps they should look to No.11 and see if they can do something about the constant tinkering with pensions and annuities. AE is a long way short of replacing the old premium inputs. Dealing with pennies is a lot more expensive than dealing with Fivers.

    • Harry, i see where you are coming from but speaking as an IFA who is at the coalface, i can assure you there is an advice gap. Where a person is put off paying for advice because of the lack of options of how to pay for it, they dont receive advice, therefore the gap exists. Ive come across numerous people who have stated “why cant we pay you by commission ?”

      • Well Mike I only retired last February and was charging fees since about 1995 and I can tell you that not once did I hear that sentence. Now don’t think that this is because I was down in London. I worked in Manchester up to the end of 1998. Perhaps we had a different client profile?

  12. Tesco once tried out red butter on consumers… tasted the same..colourless, odourless food colouring (most butter you buy today has a yellow colourant to make it more appealing, otherwise its naturally a grainy off white dirty yellow).. but public didn’t buy it.. I agree with Mike.. after 30 years in biz some people don’t like fees however you dress/colour it up. You can explain it every which way you like but some people just won’t accept up front payments.
    So Harry..how did you deal with low premium pensions?… I never found many self employed 25 -35 year olds with £500+ sitting on their mantelpiece ready to pay me for advice on a £75pm pension

  13. Trevor Harrington 21st January 2016 at 10:43 pm

    And the blind man said … “follow me!” … but he walked behind ….

  14. Perhaps Harry you might show a little respect for practitioners whose client profiles are different from yours instead of blithely assuming that anyone who considers that commission could help address the advice gap is driven by the worst of motives. Nobody’s suggesting a return to the bad old days of capital/initial units. Indemnified, customer-agreed initial adviser charging recoverable from the first two years contributions could be a practical and workable alternative to a relatively large upfront fee which many people of modest means consider to be unaffordable.

  15. “While it might be sensible to pay for advice, consumers find it hard to pay that upfront cost out of their pocket, they are looking for a way to spread it. Providers have the economic means to spread it.”

    Presumably spreading the cost means a charge to the client if they don’t maintain the arrangement. How is that compatible with Mr Osborne’s instruction to make back-end charges disappear from the industry?

    Also, now that all of those fund classes have finally moved to unbundled charges, what the industry does not need is a move back to bundled.

  16. Harry Katz is perhaps akin to a car salesman who’s convinced that everyone should purchase their vehicle outright, on the grounds that if they buy it on finance it’ll cost them more over the long term.

  17. And there’s me thinking that there was no evidence of commission bias pre RDR!

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