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On the trail of a new pay deal

Sam Shaw looks at novel ideas on broker renumeration.

Chief executive Andrew Fisher says advisers should be looking to move to fees, focus on building longer-term relationships with their more affluent clients and use wrap models rather than sales delivering immediate commission.

He says: “Focus on the clients with money. People in debt do not need financial advice – those with money do. They can afford to pay for advice and will pay a fee for receiving it.”

But Whitechurch Network managing director Ian McIver says they should not bite the hand that feeds them.

He says: “It is all very well treating commission as a dirty word now they have moved to fees but calling renewal income fund-based trail is still earning money for products you have sold.

“I am on the fence. There are times when a fee is appropriate and there are times when commission is the best option. I think it depends on the product sector you are referring to.”

McIver believes fees for investment and pension fund advice are valid but says for mortgages and protection it is less of an option realistically. The protection market in particular would suffer if commission was banned, he says.

He stresses it is easy for JS&P Towry Law to boast of the success of moving to a fees-model with multi-millions under advice but says for a one-person start-up it is less realistic.

Equity Invest director Richard Hunter says he is adopting a slightly different approach.

He says the firm, which he set up five years ago, charges a fee for investment and pension business based on a 3-2-1 model. Hunter says for the first 500,000 invested, the firm will take 3 per cent commission, for the second 500,000 it will take 2 per cent and 1 per cent on amounts over 1m.

The firm also takes 0.5 per cent as trail on all investment business.

He says by not charging an hourly rate and instead charging a fixed amount on investments, it is a simpler, more transparent means of remuneration.

But on life cover, which Equity Invest says it mainly recommends for inheritance tax purposes, the commission is taken based on the rate of the product provider.

Hunter says: “I was used to taking indemnity commission on everything in previous jobs. I set up the company five years ago and saw it as an opportunity to start again.

“Now, I think we are moving to a 1 per cent world. If we can get to a position where IFAs can take 1 per cent up front and 1 per cent trail on everything, it will give a more stable, certain remuneration for the adviser and they will earn more in the long run.”

Hunter says the reason why many IFAs are still reliant on high up-front amounts of 6 and 7 per cent is that the return time is otherwise too long.

He says if an IFA was taking 6 per cent on 1m, he or she would get the 60,000 straight away and would continue with 0.5 per cent trail. Hunter says this would mean that over 10 years they would build up a 105,000 payment.

However, a one-for-one model means on the same amounts the IFA would receive 10,000 in the first year and then 10,000 trail, so it would also take 10 years to build up to around the same amount but the level of service would be more consistent and, in the longer term, IFAs would potentially be capable of getting more income through better service.

He says many IFAs only have around 10 years to earn before they retire and do not feel it is worth their while and instead try to earn as much money as quickly as possible.

The Money Portal group head of distribution Alan Easter says there is no one-size-fits-all approach.

Easter says: “It is not about whether fees are best or commission is best. Both are right and both are wrong. The most important thing is to do a fact-find and ask the client how they want to buy products and how they want to pay.”

Whitechurch says the main challenge is that advice is intangible, even compared with the legal and accountancy professions.

McIver says lawyers get involved when someone is taking legal action, and accountants are seen to complete tax returns, for example, which are tangible events.

But he says financial advice is essentially someone’s opinion, although an expert one, which is why many consumers resent paying a fee.

LEBC employee benefits director Jim Wilson says often a fee is offset against commission anyway, meaning many firms that claim to be charging fees are not.

He says the commission the product providers pay is often inflated to cover the amount of “free” advice advisers need to give to achieve the decision to buy in the first place.

Wilson says it is a risk if an IFA gives a lot of advice for no payment and the client takes that advice and then goes elsewhere to buy the product, such as an execution-only discount broker.

He says: “I might be sticking my neck out a bit but I do not really think the regulator understands that. We often give ‘free’ advice and the commission we receive needs to cover that. In an ideal world, we would all get a fee for the advice we give but in reality it is probably about 50-50.”

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