From a regulatory perspective, advisers have an obligation to account to clients for all significant amounts of commission received, although, conveniently, FSA rules do not define what they consider “significant”.
In the past, I have come across firms with as few as three advisers who have had a full-time employee reconciling commission payments.
However, much of the time spent and money spent on reconciling commission amounts manually is now entirely avoidable.
For nearly 15 years, the industry has had mechanisms for advisers to be supplied with commission information electronically and the payments made by automatic transfer.
This has been achieved using electronic data interchange (EDI) messages.
EDI is the format used by e-commerce before the emergence of the internet.
There is also an XML data standard for electronic commission messages. Currently, only one insurer, Norwich Union, has fully deployed this although others are in the process of doing so.
It is good to see new technology being used but it is the availability of the information electronically, not the format, that matters.
For many years, a number of insurers would only offer so-called EDI commission services to the bigger adviser firms but more recently, such restrictions have been lifted and now insurers are keen to encourage as many firms as possible to receive their commission statements and payments electronically.
The most important driver for this wider use of electronic commission has been the delivery by many of the leading adviser client management systems suppliers such as 1st Software, Intelliflo and Quay of automated commission reconciliation processes.
This means that rather than staff spending hours wading through statements manually, the adviser firm can receive the message electronically and, through the client management system, the commission amounts can be automatically posted to the client record, leaving only an exception list of those cases where an automatic match cannot be made to be processed manually.
This liberates staff to spend time on more valuable client-focused activity rather than bookkeeping.
The savings that can be achieved in this way are so significant that, in some instances, the economies from automated commission reconciliation could cover the cost of the whole IT system.
The reconciliation process will usually involve the software running algorithms across the data within an adviser’s client information to match items to individual clients.
The percentage of cases that can be automatically reconciled will be influenced by the quality of the data in the advisers system and, in my experience, many firms have found it beneficial to carry out a data-cleansing exercise in order to improve the quality of matches.
Equally, many software suppliers provide a consultancy service to set up electronic commission facilities for advisers. Although this may cost a few thousand pounds, I would expect it to be money well spent as the client management system provider will have considerable experience in getting the best out of such exercises.
Potentially, customeragreed remuneration will bring further challenges to provider systems as they will need to be able to recognise a wide range of commission shapes.
Interestingly, this is another area where, if the provider cannot provide an electronic service, it would appear reasonable for the adviser to pass on the additional cost of processing paper to the customer as, if the provider is not prepared to deliver payments electronically, the adviser should not be expected to subsidise them.
The more I look at the concept of customer-agreed remuneration, the more it appears that any provider without a complete suite of e-commerce services will be increasingly less likely to be selected by customers if they have to pick up the cost of the extra work the adviser has to do because the provider has failed to make the necessary investment in technology.
Almost all life and pension providers and the majority of wrap providers can offer electronic commission data but this is far from the case in either the mortgage industry or from individual fund management groups.
It is surprising that even some of the biggest mortgage broking firms still have to put up with paper-based statements from many lenders.
This provides significant processing issues given that mortgage procuration fees can be for relatively modest amounts.
Several advisers have complained to me that even when lenders do supply electronic payment information the level of information provided is not as detailed as they would like.
A similar issue still applies with some life and pension providers, the most frequent failing being that life offices fail to differentiate between renewal and trail commission.
One big IFA told me recently that they have amounts running in to many hundreds of thousands of pounds each year that they cannot reconcile in the detail they would like to.
In the case of fund management groups, a handful of firms offer electronic commission information but many more can still only offer such services to a few big firms.
Where providers are not offering electronic services, there are organisations that will take paper commission statements and convert them to electronic data capable of automated reconciliation but I feel that if the provider cannot deliver information in a non-paper format, it should be them rather than the adviser that pays for the cost of this.
I would normally advise firms to ask their client management system provider to identify suitable suppliers for paper to data commission services as the software provider will be aware who has been most successful for other customers.
Detailed commission information is the key to advisers being able to value their practices accurately, particularly as more advisers move to a servicedriven model involving recurring income.
Failure to deliver commission with adequate detail undermines this process and inhibits the ability of the adviser firm to value their business.
With client management systems having put in place the processes to enable advisers to save significant amounts of time through automated processing, it is important that all product providers that distribute through adviser businesses deliver commission and other remuneration information to them in the most costeffective way.
There is certainly a critical mass of providers doing this that should be more than sufficient to justify advisers implementing commission automation. Any advisers who choose not to are simply opting to spend more than they need to process payments.