The FSA's proposed “menu for being open with customers” has laudable objectives.
The FSA wants consumers 1) to understand the cost of advice, 2) to understand the various options when paying for advice, and 3) to shop around for the best deal.
I believe the proposed changes will be much more effective in achieving the first two of these objectives than in achieving the third.
IFAs, and indeed multi-tied advisers, will set out a key facts document, a guide to the cost of our services, summarising the advice options (fee and, if appropriate, commission bases offered) to the client before any advice is provided. This document will drive a focus on the type of service being offered by the adviser and how it is paid for – potentially a great shop window for IFAs.
For example, to what extent is the service offered a one-off financial planning review where up-front lump sum commission might be appropriate? Or is it an ongoing review of asset allocation, fund performance and investment manager, in which case fund-based commission might be preferred both by adviser and client?
The latter is an area where we see an increasing focus as many more IFAs concentrate on asset allocation – filling a space historically taken up by life offices.
The new guide provides an opportunity for IFAs to discuss these services – the alternative of trail commission in particular will lead advisers to use ongoing investment advice as a source of added value in the client relationship.
Also proposed is the publication of market average levels of commission alongside the maximum published by the IFA. These will be calculated by the FSA and reviewed annually based on questionnaires sent out to product providers in March.
One has to question whether this is a degree of disclosure too far. How much information can consumers digest at one time and can they make a value judgement based on this? Given the range of different advice models offered, will consumers know what average represents?
Turning to the question of whether customers will shop around more as a result of the new proposals, there are two elements – a) will they shop around between sectors (IFA, multi-tied, tied) and b) once decided on, say, tied will they shop around within that sector?
Although tied advisers are remunerated differently from each other, they will have to, under the proposals, disclose costs based on commission equivalents similar to those currently disclosed at point of sale. These figures take into account a broad range of costs and are difficult to compare with IFA commission/fees.
Given the different ways that relationships are structured and the different sorts of service offered, it seems unlikely that many consumers will, on the back of the new guide, move between the IFA, tied and multi-tied sectors.
Once the client has deci-ded that he is comfortable with, for example, tied advice at his local bank branch will the new guide encourage him to visit other banks on his local high street to assess relative costs? It seems unlikely, given the effort involved and the fact that cost is only one element in the value chain.
I would question, therefore, whether enough consumers will shop around to actually make much difference to the FSA.
However, discussion between client and IFA of the different charging options avail- able and the details of the various services offered will be a powerful endorsement of the flexibility of the IFA service.
So, two out of three ain't bad and after a long and hard journey the FSA's menu system looks like it will help take our industry one big step towards a better future.
George Andrew is head of industry relations at Scottish Widows