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Own goal

It is not for the regulator to decide if my client pays commission or fees

There can only be one subject that I can possibly write about with the start of the new football season – which premiership manager will be the first to get the sack?

On a more serious note, the subject that is exercising most of our minds – FSA discussion paper 07/1 – is the review of retail distribution. Surely the method of distribution is not for the regulator to decide but for a well functioning market.

Keeping up the football theme, if the author of the aforementioned discussion paper was a premiership manager, he would be getting the chairman’s full vote of confidence and the supporters of the football club would be chanting: “You don’t know what you’re doing” at the manager’s substitution of their main striker, to be replaced by a defender when the side is 2-0 down.

It seems to me that this discussion paper takes us back to where we were three years ago, when depolarisation was mooted. The same idea seems to have reinvented itself in this paper, that the definition of independence should be determined by the method by which an adviser is remunerated.

Just for the sake of the authors of the report, the English dictionary defines independence as “free from authority, control or domination of somebody or something else, especially not controlled by another state or organisation and able to self-govern. Able to operate or stand on its own, not dependent on another. Not forced to rely on another for money or support. Capable of thinking or acting with-out consultation with or guidance from others. Carry out or operating without interference or influence from interested parties.”

I have searched the dictionaries extensively and have nowhere found the definition of independence that this review paper has come up with. To tag remuneration by fee and fee only to the definition of independence is absurd.

Surely it is up to my client and me to decide by which method they will pay me for my services. Please show me the research that shows that clients want to pay fees for financial advice. This is not a matter for the regulator.

If the regulator is concerned about advisers being influenced by levels of commission paid by some products, then the regulator should concentrate on making sure those products are not available or perhaps this would mean taking on providers and IFAs are an easier target.

I was recently involved in designing a product for the IFA market and I was saddened by the number of our colleagues who plainly told me that a product paying 3 per cent initial plus 0.5 per cent trail was too low and could we not increase the amount of commission payable upfront.

There is a vicious circle here, in which providers design products for advisers and include vast amounts of commission because advisers want those products. Surely it is for the regulator to break this cycle and insist that providers not exceed a certain level of initial commission which is the norm in the market. The regulator should also focus itself on targeting advisers who take excessive commission on products, for example, 8 per cent on an investment bond. This amount of commission on a bond is outrageous. No provider should be allowed to provide such a bond and no adviser should be allowed to take such a level of commission.

Therefore, my funda-mental problem with this review of retail distribution is that it does not address the problem of bad advice and commission-hungry advisers.

All it will do is put these advisers into the second tier of advice which, it says, has no future. So why create it at all? What we will get is another review in three or four years to address the problems created by this review.

The manager has taken off the striker and put on the defender when we need to score goals.

John Winful is a partner at Winful Associates

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