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Means to an end?

Sam Shaw finds opinion divided on The Money Portal’s move to help advisers transfer from up-front to fund-based commission.

The name comes from the ancient Greek word entelecheia, apparently coined by Aristotle, and translates into English as “having the end within itself”.

But what does this mean to TMP’s advisers, many of who might still be suffering fallout from the demise of Millfield nine months ago.

TMP has spent the latter half of 2006 and the first quarter of this year developing the model, which is now ready for launch.

It comprises a practice buyout scheme, which is calculated by figures based on amount of revenue, source of revenue, adviser risk ratings, cleanliness of data and a multiplier based on the term of the payout.

The first step in the initiative, though, and perhaps deemed the more innovative by some supporters, has been termed “free to trade”.

TMP says in light of the FSA’s retail distribution review, action is needed to address growing concerns about advisers’ perceived over-reliance on high up-front commission, policy churning and a mismatch between the remuneration models of the manufacturer and distributor not seen in other industries.

TMP says across foodstuffs, fast-moving consumer goods, industrials, oil and gas and telecoms, the manufacturer revenue style matches that of the distribution revenue style, categorising all into either “transactional” or “annuity”, whereas in financial services, the two streams differ.

TMP likens its model to that of a mobile phone company. Group head of distribution Alan Easter says: “You get the handset free because you buy the minutes through the service provider. We want to be that service provider, giving you minutes – an annuity generated by assets under advice – and we will provide you with your handset – the tools you need to do your job such as compliance, T&C, PI and office – for free.”

TMP says the four main factors driving the need for change are the FSA’s stance, manufacturers issues around new business costs and attrition where high commission levels are unsustainable with low persistency rates.

The group, which calls itself an “asset gatherer”, is seeking to move its advisers to a fund-based income model, so far with the support of 11 major providers – Aegon, Axa, Clerical Medical, Cofunds, Friends Provident, Legal & General, Lifetime, Norwich Union, Prudential, Scottish Widows and Zurich.

But not all providers are in favour of TMP’s approach.

Although TMP says over 80 per cent of its business comes through seven firms, one firm expected to be among those seven is a notable omission from the line-up of supporting firms.

A Standard Life spokesman says: “We are supportive of efforts to move to alternative methods of remuneration in the market but we took a business decision not to participate in this initiative at this time.”

The 11 providers on board will pay TMP additional commission 15 basis points on single-premium onshore and offshore bonds and regular-premium personal pensions initially, before including mortgages, protection and funds later this year.

JS&P Towry Law, which is moving towards a feesonly model, has a certain empathy. Certified financial planner Patrick Connolly says whether the comm-ission is initial or renewal is irrelevant.

He says: “I can understand the approach taken by The Money Portal but the difference between initial commission and renewal commission is just timing. The intermediary still needs to sell a product that pays a commission in order to get paid. If they do not sell a product, they do not get paid. This is still product selling rather than holistic financial planning and the adviser may still have a financial incentive to do something, that is, sell a product, that may not be in the clients’ best interests.”

Some might say, however, that as the FSA appears keener on fund-based rather than initial commission, this is still a forward-looking move in light of the retail distribution review.

Aegon is one of the providers supporting Entelechy. Spokeswoman Lesley McPherson says: “The most important aspect of this is that it builds value in advisers’ businesses through moving away from initial commission towards a more fund-based approach. From Aegon’s perspective, it is an attractive adviser business model as it reduces the impact of initial commissions and means the persistency risk is reduced.”

Easter says where models and consultants have previously tried to promote the transition from commission to fees, they have all neglected to account for what he calls the “lifestyle” or “spouse” factor.

He says: “They all do a fantastic job at explaining the benefits and how the transition can be made but not one of them will tell an adviser how to go home to their spouse and say, ‘I may only be earning half as much money for the next three to five years but it will be worth it in the long run.'”

However, some of TMP’s peers, although in favour of the concept of Entelechy, cannot see how it benefits the adviser in practice, branding it self-serving.

Thinc Group chief executive Simon Chamberlain says: “This would be great but the money is being paid to the wrong people.

“TMP are receiving the money, I would imagine the 15 basis points, and adding it to their bottom line, which they would not if this were a real scheme for the advisers. How does it help the advisers if they do not get to keep the money? The concept is perfectly sound but we believe that a three to four-year hit on income is needed for somebody to make that transition but they have to be given the money.”

So as yet another remuneration option emerges, it will be interesting to see who leaves, who stays and which other groups follow suit or devise their own alternative model and whether advisers really do need to erode that bottom line in the short-term in order to swap payment streams.

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