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Sheriar Bradbury: Massow-style firms doomed to fail

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Only two years after setting up Paymemy.com, Ivan Massow admitted that the company was no longer viable due to escalating regulatory costs, forcing him to shut up shop.

Massow was neither the first and is unlikely to be the last to try and make a quick buck out of a commission return business as the decision by Finance Club to buy the ailing company shows, but his story should serve as a warning to others.

These companies are set up in the guise of an IFA in order to be able to obtain commission from the providers, but by doing so, they incur all the costs of being a regulated business. As Massow himself admitted, these costs can be hard to bear.

A company like Paymemy.com would need a vast number of clients in order to justify the costs and taking a 20 per cent cut, as Massow’s company did, was not going to suffice unless clients joined en-masse.

Commission return companies are targeting a certain type of DIY client who has shunned the decision to have a financial adviser. While that is their prerogative, it is worth questioning just how many DIY investors out there are investing large sums of money in order to make the commission worthwhile.

It is clear these companies will seriously struggle to attract enough clients. The merits of financial advice are widely acknowledged among investors and you cannot underestimate the power of having someone knowledgeable to guide and advise you.

Furthermore – and this is what rankles most advisers – paying commission returns to these sort of companies defeats the whole object of what commission was designed to do. Commission on investments paid by the provider to the adviser is done as payment for their service.

Commission return companies simply act as a middle man, providing little other service than trying to get investors some of their money back while taking a decent slice in return for the favour. Insurance companies should take control and cut off payments to these companies; after all, what proof is there that any type of service is being provided? Friends Life recently said they intend to stop paying trail commission and others are likely to follow suit.

For those who choose not to act, I have no doubt that the FCA will soon force them. The FCA has already proposed a consultation on whether renewal and trail commissions should be phased out in 2016 and why not? Trail commission goes against everything the RDR has sought to achieve.

It is well known that if advisers give advice on an investment product that pays commission, the very fact they have advised on the product is likely to lead to a “disturbance,” which would result in the commission being switched off, whereas if they had not advised they would be likely to just pick up the commission.

As long as there remain such deterrents within the financial advice market, the FCA still has some way to go to achieving its fair and transparent goals for the industry. 

The reason the FCA declined to switch off trail at the start of the year was it recognised too many businesses would falter but I do not see this grace period lasting indefinitely, as the regulator continues with its move towards creating a more transparent industry.

Companies that seek to offer commission returns are going to really struggle to create a viable business model.

Sheriar Bradbury is managing director of Bradbury Hamilton

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. There are no real Massow style companies any more, companies such as Clubfinance (not Finance Club as stated) do provide a service to clients (at the simplest level a marketplace for investments). Other companies that provide similar service in the investment arena are Hargreaves Lansdown and Best Invest. In the insurance market middle men such as Confused and MoneySupermarket are strong.
    There are lots of people who choose to do it themselves and middlemen provide a marketplace of options for customers to choose.
    IFAs are also important to many customers who want, need and value advice. I do feel sorry for many IFAs as customers more and more are demanding simplicity and the regulator is seemingly doing everything possible to make IFAs interaction with them as complicated as possible.
    The key message I would like to make is that most of the successful ‘middle men’ who are still about, such as Clubfinance, understand the importance of advice and are respectful of their advisory colleagues in the industry.

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