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Killer commission

Indemnity payments will bring about the end of the IFA species

I have absolutely no doubt in my mind that within a few years the genus that everyone calls an IFA will be as dead as the dodo. They are an endangered species.

The cause of their demise will surprise you because their executioner claims to be their saviour. It is not IFAs’ greed for commission that is the danger (although that is part of the equation).

It is not even the FSA, although all regulation, even that not encompassed by the Financial Services and Markets Act, makes life increasingly difficult, money laundering, employment laws, the increasingly complicated tax regime, etc.

Indemnity commission is the fly in the ointment but IFAs can hardly be blamed for taking it. IFAs are not going to bite the hand that feeds them but I believe that it is the hand offering them indemnity which will strangle them.

Is everyone blind and unable to see the vision that is slowly unfurling in our industry? The esteemed head of the ABI Stephen Haddrill cannot foresee the complete derailment of the ubiquitous gravy train.

The general public will reject the current practices of the industry. ABI members and their IFA distribution are hardly likely to reject churning and indemnity commission when Haddrill publicly condones it. The Government, the general public and our regulator all abhor the way the industry is remunerated.

Wham, bam, thank you ma’am, fat up-front commission. Give us your money, we’ll take our commission and you’ll never see us again.

The industry can only survive in a commission regime with the abolition of indemnity commission today. Advisers should be paid for the work they do – when they do it. They should not be rewarded for a sale and benefit from the lifetime commission of the product on day one.

Investment products should have a built-in service charge but no initial commission. That would mean that any investment could be taken over and provide remuneration to the person who looks after the client.

It would put horrible, inefficient, undercapitalised brokerages out of business but the individuals that work for those businesses can rise like a phoenix like and make a living. Initially they will eke a frugal existence but they will have quality earnings and will build great businesses.

Unless a sensible commission regime is instigated immediately I am afraid the future is fees. If the industry does not put its house in order, the Government and the FSA will impose it. Remember what we got when self-regulation did not work.

Now let me tell you about fees. Accountants, solicitors, architects and chartered surveyors find it difficult to charge fees. It is almost impossible to charge an hourly rate, they charge a fee for a job. I can just see you suggesting that you are going to charge £10,000 for two hours work. If you believe IFAs can charge fees when professions that have claimed they are fee-based for a hundred years yet struggle to charge fees, then you need to think again.

If indemnity commission is not abolished today, fees will be imposed on the industry. Result, Independent Financial Advisers – RIP. Who was the executioner? The stupid, irresponsible, incompetent life companies paying unacceptable, obscene, leapfrog indemnity commission.

I still have not got to the bottom of why this indemnity commission is paid. I think it is because “We have always done it that way”. The problem is that the new young guns in these life companies forget that charges were three times higher (remember capital units) and that lapses were 10 times lower and you only got return of premium if you died on pension contracts.

Perhaps it is just altruism – dream on. Perhaps it is to prop up lame duck businesses in which they have invested millions – albeit, all those are now seeing their demise.

I think it is just weakness and a void of ideas.

Unfortunately, when the Government abolishes commission, the life companies will find they really have lost their distribution. Who is to blame for allowing churning and incensing the public – the Government and the regulator? I will tell you. It is the hand that purports to feed you.

Peter Hargreaves is managing director of Hargreaves Lansdown


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