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Keith Richards: When is commission not commission?

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The advice profession has evolved post-RDR and continues to gain positive recognition for the key role it plays. As a professional body we would not be in favour of a return to commission of old and this view is clearly shared by many across the advice sector. I equally doubt commission would appeal to most providers, given how capital intense and uneconomical it was.

So why, all of a sudden, is it back on the agenda? Have we simply misinterpreted the FCA’s recent comments on the matter and the key underlying reason why it is open to consider advice fee options?

Three years after RDR forced a change to fee-based advice (or, to be more specific, abolished the factoring of commission into investment products) it is permissible for transparent adviser fees to be facilitated via the provider or platform as a client option.

So why is it that the Financial Advice Market Review is giving rise to speculation that some form of commission may be reintroduced? Quite simply, it is not. However, the FCA is open to exploring options to recover a transparent advice fee from regular premiums, in particular for consumers who want to save but may be put off seeking advice because of up-front fees.

In order to best serve the interests of a wider segment of consumers, the review is considering the introduction of a lower cost, “simplified” regulated advice solution, which will also include the option for advice fees to be recovered over an agreed period of time from the premium – possibly called a “client agreed advice fee”.

Vertically integrated firms are already well-placed to operate such a system in a post-RDR environment, as recovery is easier to administer, but development to improve consumer options and access should be open to all models.

The inclusion of transparent CAAF would increase the options available for the public to pay for advice, reduce barriers to engagement and be capable of working equally well for full advice. More importantly, it can be implemented today, does not conflict with RDR Conduct of Business rules and would not therefore be commission.

Keith Richards is chief executive of the Personal Finance Society

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. “However, the FCA is open to exploring options to recover a transparent advice fee from regular premiums”.

    Weren’t these front loaded contracts deemed to be ‘bad’ which is why stakeholder was introduced?

  2. Well written and well argued –

  3. “client agreed advice fee” – We already have this do we not? Adviser charging (AC) – many providers already allow this to be spread over a period of time, if required (for regular premiums). Why go through the hassle to create yet another remuneration term to confuse the public?

  4. Sounds a lot like Customer Agreed Remuneration which was thrown out by the FSA during the RDR process!

  5. Unless, the idea is CAAF – is for those providing basic or ‘simplified advice’, i.e. do not need to have the minimum Level 4 qualifications.
    Whereas, Adviser Charge is only possible for fully qualified/regulated advisers?

  6. Couldn’t a transparent advice fee be referred to as commission or perhaps a bonus. Surely a percentage of the cost, spread say over 6 years, could be acceptable if the client understood how they were paying for the initial advice.
    An annual percentage fee or commission(bonus) could be taken for regular ongoing advice, say between .5% and 1% for the regularity and complexity of the advice.
    Isn’t this what St James’ Plaice do and quite successfully without the regulator minding?
    See how easy that was, simple business model, clients happy, no advice gap!
    When Equitable Life didn’t call it commission they called it a bonus( same thing different words) all the politicians and accountants fell for it.

  7. Trevor Harrington 4th February 2016 at 12:09 pm

    Sean – they were only deemed to be bad where the client suffered a penalty when they subsequently ceased paying premiums, or withdrew their investment before a set number of years had passed after inception – in other words “indemnity terms”.

    If there was no detriment to the client, or deduction from their investment, in either of the above actions subsequent to commencement, it is termed a “Fee” which has been deducted from the clients investment at source.

    Then you get into disclosure – was it / is it hard enough ?
    In my opinion, it was not hard enough then, and it is not hard enough now, and that applies particularly to the so called fee chargers where the regulator is trying to make them define a “Fee” in monetary terms before they start work. In fact it is called a commission – and hence we arrive at the full circle.

  8. Sounds very like Customer Agreed Remuneration to me. Is that not what a lot of people were talking about pre RDR in order to facilitate payment to us for our services. Could be paid by the provider if the client wanted but at a rate agreed with the client and not at the rate at which the provider said they would pay.
    This could and should have been the way we went under RDR but of course Hector the Protector and his crew knew far better than anyone else and said their way was best. Well thought out Hector my boy

  9. Where the issue arises is that the time cost of advice is typically at the front end of client engagement and whilst in many cases this isn’t an issue, for regular premium advice it can be.

    Let’s not forget that an initial advice charge can be broken down over a long period of time, providing the total amount is clear and finite.

    Should the cost of this advice be bundled into plan charges? No, I don’t think it should otherwise it reopens the issues outlined by Sean Kelly above.

    Therefore is the solution that a client agrees the initial advice charge, pays it ‘on the drip’ but if there is some interruption, the provider pays the balance from the FUM. Something that can already be done…. The only drawback is if a contact ends VERY early – but that should be rate. In some cases.

    The last thing I feel we want is a return to oblivious clients paying massive amounts of costs to meet commissions for advice they think is ‘free’.

  10. Whats all this “we” Mr Richards ?? Remind me please when you actually even asked my opinion?

  11. I have often seen the comment the Implementation Fee of x% on £X . invested

    I have just been working on a client and came across on of there contract note from 1999
    That stated Consideration £ X Commission £ Amount Due £x to be paid

    I then looked up a recent letter sent direct to a client that summarised as follows

    Thank you for your payment of £x We have deducted a fee by way of an Advisers Fee of £x The balance to be invested £x

    The action the same All that has changed is the words

    if you Google sales commission you make a more the following explanation A sales commission is a sum of money paid to an employee\ agent upon completion of a task, usually selling a certain amount of goods or services.

    If the FCA are going to re introduce the an commission and we use the above definition it should mean the FCA would expect an adviser to give the advice for free only to be paid if the client accepted the advice

    If the client cannot afford or will not pay the fee or take up the advice even on a Simplified product how can the adviser get paid for his work and time ?

    When RDR was first raised by the regulator

    An industrial figure whom I admire in respect of the industry made the following statement.

    One day in the future whoever is in charge of regulation at strategy meeting might come up with the following idea to try and encourage consumers to seek advice.

    Lets introduce a system in which the consumer can go and receive advice. If they decide to agree with the advice. The adviser could be paid be paid by way of introduction fee by the company he places the business with. If the consumer does not want to take the advice he will not pay for the advisers time.
    I am sure that is how the commission system worked looking back it seems a brilliant idea why did they change it

    I agree it was but the system was badly let down by EU and competition regulation. One stage the provider at a maximum commission agreement agreed between themselves. It appeared that this was uncompetitive and did not allow competition. The the providers who through this obscure regulation were allowed to buy the business at any price.

    The difference with the new commission system is that it will be controlled by the consumer. He will tell the provider how much to pay

  12. Front loaded commission is not the answer. However a return to a trail commission style would be. Not commission but an explicit charge but one that allows a firm to take an ongoing annual charge at a fixed percentage but does not require the adviser to service it pro-actively. Make it 0.x% p.a. for provision of an online tool for valuations etc and access to adviser when needed. It turns into a cross subsidy model but that is needed for small value stuff.

  13. Trevor Harrington 4th February 2016 at 2:04 pm

    Other than those scoundrels who want to be paid for a single service by spreading it over several years from a product, none of us are very far apart at all …. it is just the terminology which is emotive.

    Whatever you call it (the remuneration), and no matter where it comes from (the product or the client), what is absolutely certain is that there should be no detriment to the client or his investment, if he decides to cease paying or withdraw from a product early.

    If you want to be paid for a service “up front”, then you should be paid for that service “up front”, and if you want to be paid for an ongoing service, then you should be paid on an ongoing basis, which the client can then redirect if you fail or cease to perform that service.

    Let’s keep it simple – If you do it, you get paid at the time that you do it, and if you cease doing it, then you cease to get paid at that point.

    • I have just agreed to service two clients in the way you mention Trevor. Signficant work needed for a client for 3 months, then 6 months lower level, then to ongoing reduced fee, all of which can be terminated any point by client and both parties happy.

  14. Totally agree and is exactly what I stated.

    The bigger issue for me is that we continually see poor wording causing confusion. Its not commission its fees spread over a period, its not advice provided by MAS and TPAS but guidance.

    Does anyone else thing these problems are being caused as those in charge really do not understand the industry sufficiently to see they might be part of the problem, however well intended their intentions might be?

  15. Reminds me of the time when Britain couldn’t afford new aircraft carriers, even little ones. Through deck cruisers were fine though….

  16. Thing is that the payment needs to be agreed between he who gives the service and he who receives it.

    This would point to a fee based model. However, for an IFA the bulk of the costs are up front. If it is to be paid by installments then the customer’s needs to commit to a stream of payments. If not, the customer just makes one small payment and walks away.

    If the provider is to pay, then the commission for a given product must be fixed.

    There needs to be one or the other. Failure to do so will lead to more confusion.

  17. I have an idea. Why do we not all have our ways to charge clients and as long as the client his happy then that is all that matters. It is not for any adviser to tell me (or any other one) what the “right way” or “best way” is to do business.

  18. I believe one of the key aims of FAMR was to understand why there is so little consumer uptake for financial advice, and how to improve this. We offer a professional service for which we need to be remunerated. However, given where financial services have been in the past, very few people realise there has always been a cost to advice. Would education help?
    I believe the Personal Finance Society, being our professional body (whether you are a member or not) are trying to move all aspects of the industry towards this point. If the majority of the public see the benefit of good advice, they will value it, and then accepting the fee for it will not be an issue. It will simply be down to how best to facilitate it for the client and advisers mutual benefit.

  19. Payment of a fee for the work done, upfront. It’s really quite simple. Anything that looks like commission is a backwards step in my opinion.

    The standard of English used in some of these submissions leaves much to be desired!

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