Last Friday my dog reached the grand old age of 16. For the dog-lovers among you, he is a West Highland terrier and his vet bills to date are close to £10,000.
We have had insurance for him since he was a pup, and while premiums are now over £100 a month we think he is worth it.
Many of our clients are pet-lovers, and will be paying similar amounts, yet do not have income protection for themselves. It is these kinds of contradictions we need to bring to their attention as we try to move them to more explicit charging.
While the RDR has changed the labels for advice, many feel more widespread changes are yet to occur.
Last week, Standard Life announced it will remove all funded initial commission by the end of the year before cutting off commission on auto-enrolment schemes with a charge above the Government’s 0.75 per cent charge cap in April 2015.
This indicates that the fuse on renewal commission is well and truly lit. Many insurers did not operate triviality, so profits came from masses of small-value annuities that collectively add up to a lot.
Ironically, the same issue will kill any chance of changing renewal commission to an adviser charge; how many providers can cope with the adviser charge on legacy products?
Small commissions may add up to big amounts in total, but on an individual client basis may amount to only a few pounds a year. These kinds of payments cost far more to collect than they are worth.
So get ready for the big renewal robbery, where providers stop paying and pocket the commission to prop up their frail business models. It will be interesting to see whether the FCA just stands by and watches this happen, particularly in light of its comments about putting clients at the heart of a firm’s culture.
It is not impossible to get commission back to the clients. But the loss of profits on annuities means the chase for margin will continue. That means efficiency is now the most important point of focus. We need to work smarter, not harder, as margins decrease. As the market fails to grow to compensate, it is a case of when, not if, this pressure on margins will intensify.
Yet some advisers have gone ahead and increased their charges without improving or adding to their services. This simply prolongs the distasteful habit of seeing clients’ funds as a reservoir of cash to fund what was commission and is now the adviser charge.
As for independence, those advisers who want to hold on to the independent badge should know it is not about products but about starting with a clean sheet of paper.
My dog is named Texas in honour of his birthday – US Independence Day. On the theme of independence, let’s hope the FCA looks again at the definition of the term and focuses on clarity rather than semantics. Being an IFA is about independence of mind and in the way they are paid. It is not about product selection.
Action on this issue will show the FCA either to be in touch with advisers or to be falling into the same trap as the FSA did.
Robert Reid is managing director at Syndaxi Chartered Financial Planners