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Passive resistance

Industry anecdotes suggest that IFAs are moving to passive income streams and away from a reliance on initial commission but research from True Potential tells a different story.

The firm’s Guide to Distribution, in association with Ernst & Young, claims to be the most extensive ever study into adviser business profiles, with over 8,000 individuals interviewed.

The study found that 79 per cent of adviser turnover comes from initial commission, with 16 per cent from renewal or trail and just 5 per cent from client fees.

Ninety-one per cent of the advisers interviewed were independent, 6 per cent were multi-tied and 3 per cent were tied. The 8,238 advisers came from 1,357 firms.

But Money Portal head of strategy and distribution Alan Easter says he wonders how many advisers would have preferred to have charged fees but it was the client’s choice to pay by commission.

He says all Sage and Bates advisers, given the choice, say they would prefer to be remunerated on a fee or reduced initial and trail basis. When they put the choice to clients, however, they opt for commission.

Easter says: “Is this actually that 100 per cent of advisers would prefer to take trail or fees but 79 per cent of clients said they would rather pay by initial commission than write a cheque?”

He says treating customers fairly compels advisers to offer clients a choice, which in most cases is to pay by commission. However, Easter says the method of remuneration is only one part of the equation.

“It is explained that the cost of me doing a pension is £3,000 and the client is given the choice – would you like it to come out of your pension pot or would you like to write me a cheque? If that is customer-agreed remuneration, the vast majority of IFAs have already adopted this business model,” says Easter.

But Informed Choice joint managing director Nick Bamford says: “Who is to say that pensions cost £3,000 to arrange? What if a pension is not the best option of investing your money? We are trying to make it as easy as possible for the clients by commission offsetting against the fee. That way, the client does not feel they are being sold anything at the advice stage but they are prepared to pay for the advice because they are getting value.”

He says if a client has a windfall of £100,000, they will probably be happy to pay £1,000 for advice on the best way of managing their money, even it is paying off debt. However, what happens when the best advice does not lead to a product sale?

He says: “There are a lot of very good IFAs out there who get paid mostly by commission but it puts pressure on the adviser to convince you that they are giving you the best recommendation rather than the one that is paying them higher rates.”

Bamford blames the situation on too many products designed around “smoke and mirrors”. He says: “Whether you write a cheque for £3,000 – if that is the figure – or it comes out of your £100,000 policy, either way, only £97,000 is invested. It is just that you will be told that you have actually invested 103 per cent but if you were to encash it straight away you would find it was still only £97,000.”

Syndaxi Financial Planning managing director Robert Reid says he believes only 5 per cent of advisers are fee-based.

He says: “Why should IFAs be skilled at transferring their business models from a commission-based model to that of a passive income stream? It does not happen overnight and they should not be expected to be able to do that.”

Bankhall chief executive Peter Mann believes a sea change is taking place, however. He says: “Things are changing. Certainly, at Bankhall, we are seeing more and more of our advisers moving to a passive income stream. The appeal of a high initial commission is just not the same as it used to be. More are taking a lower rate of initial commission and opting for trail, say, 3 per cent plus a half, and rebating the trail back into the policy.”

Mann says as more advisers are considering their exit plans, building up recurring income in their business is becoming increasingly important.

Easter says CAR will not be about how much the IFA gets paid but rather about what the client gets for their money.

He says: “You can break down the product cost, the commission and what it costs to service the client, so the customer can truly understand it. Maybe what this survey shows is really just that few clients understand that their £3,000 would be worth more if it were invested rather than kept out of the policy to pay the adviser and so are prepared to pay it out as a fee.”

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