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The meaning of free advice

It had been my intention this week to write about the interview given to Money Marketing by Aifa director general Stephen Gay and the trade body’s chairman, Lord Deben.

There are a few little nuggets worth teasing out in their dialogue with MM editor Paul McMillan, which I hope to do at a later stage.

But that will have to wait a little while because, in a straight choice between the words of two grown men sitting cosily next to each other on a sofa as they finish each other’s sentences and the opinions of real-life IFAs who read this paper, it is the latter who win out.

Last week, I wrote that the reason why many financial advisers opposed the RDR was not the requirement of having to meet the FSA’s new qualification requirements but the move away from a commission-based system of remuneration.

I had expected a massive tirade against my remarks, yet, when they came, the comments were much more nuanced.

They are striking by their anger, honesty, naivety and – to my surprise – occasional agreement with the views I was expressing.

For example, there is the adviser who wrote, condemning my “anti-IFA rant” and then adds: “I totally agree that there were many useless IFAs before regulation. The FSA has not really changed this position and we all know many of the original failures just left the industry.”

Wasn’t that one of the indirect aims of regulation, to make life so tough for some that they left?

Confounding my suggestion last week that the majority of IFAs opposed to the RDR were those over 60 or approaching it, one email was refreshing: “There is a lot of truth in your accusation that many IFAs are mainly concerned about the loss of the old-fashioned commission option.

“I am just 60, and have spent all my life in financial services. I very rarely take full commission (maybe for a very small case), and always raise the issue of costs/charges/ commission. Occasionally, I charge a fee instead.

“However, as we get older, it becomes more difficult to retain information that is only required for exam purposes. I had 110 points of the necessary 140 points at the beginning of the year. I took the G60 exam out of choice many years ago, and enjoyed it. Last week, I passed the R04 exam, after stressful studying. Only 20 points to go – hooray.”

Another adviser, who has spent more than 30 years in various areas of financial services, wrote: “I am in my mid-50s. I do not agree with you [that advisers are more concerned about commission income rather than examinations] but I think you might have a point.

 ”I am fortunate in that I was offered access to occupational pensions when I first started working and, for me, retirement income will not depend on my earnings from client commission.”

But he adds: “I know that a lot of advisers have built a business in the hope that trail income and perhaps some business premises will become their income stream into retirement. In my opinion, that is complete stupidity.”

Contrary to my assertions last week, for this adviser, it is the challenge of obtaining the new qualifications that matters: “Like many people of my age, I find absorbing and retaining information is difficult.

“I am not against training or developing new skills but having my future determined by answering questions in a three-hour exam is awful I fail to understand why the regulator cannot sample the advice I given to clients over many years and then be in a position to evaluate my ability, skills and knowledge.”

By contrast, another IFA wrote in: “The advice sector continues to be populated by one-man-band, under-qualified, second-rate individuals whose business model is predicated on the acquisition of one or two new clients each month and the necessity for each of these new clients to generate disproportionate levels of commission.

“The RDR has made such a business model defunct and thank goodness for that, the advice sector will be a much healthier place without these people – and you’re right, I am only 46.”

Another adviser simply said: “Hit. Head. Nail. On. Just to bugger up your email stats further, I’m 42.”

Unfortunately, confusion still reigns on the issue of whether, in a commission-paying environment, advice is “free”. One IFA told me: “I have never given clients the illusion that advice and my work is ’free’, I deal with people who are more sophisticated than that.”

By contrast, another said: “All my advice is free to the majority of my clients who choose the commission route. I will have two appointments with them and in between first and second they would receive a full written report from me. If at the end of the second appointment they choose to walk away it has not cost them not one penny. In my naive little world, is that not free?”

It might be – but is this a viable business model? You tell me.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 28 comments at the moment, we would love to hear your opinion too.

  1. This is a pretty lame article, Nic. Looks like you hurried this one and just used others comments to pad it out.

    Advice is frequently free and yes, this is not a sustainable business model if too many clients receive free advice. However, the nature of client/adviser interaction is that we do offer free advice and we do use in-built commission to provide a product purchase where the client does not have to physically part with funds.

    This is called consumer choice and as a consumer champion you should be encouraging freedom of choice rather than follow the FSA notion of restriction.

    Winston Smith wouldn’t settle for this.

  2. I agree that a lot of really bad, and often daft, advisers left the industry, years ago, because of regulation (which was a good thing) but you mention the word naivety in your article and it is just plain naive to think that the die hard, dishonest practitioner in any business, including ours, is going to be stymied by the RDR. They won’t, which is partly why the RDR is a farce. It will force good IFAs out, which some people have termed as throwing the baby out with the bathwater. Except this could be throwing the baby out but leaving the bathwater in, to become more stagment by the day.
    Also, Nic, I cannot understand why your are against the client having the choice between commission and fees. What exactly is the problem with that? I have asked several people this question, over the last few years, and have never had an answer. If you would care to furnish one I would be most grateful. If I have missed it, in the past, you have my apologies.

  3. Not much value add in this article – there is more to gain from reading the comments in the context of the last one – poor show, I feel.

  4. Fees and commission.
    One point that seems to be forgotten in this is the less well off client.
    Many of the people I have dealt with over the last 30 years cannot afford fees up front. They would prefer a product charge (commission) perhaps paid for over the lifetime of the contract.
    It is these people who will be denied the independent advice they need and be driven into the greediest bunch of robbers, the banks, or who will do nothing for their financial security.
    More sophisticated clients appreciate the need for fees and can generally afford them.
    Often a liitle bit of simple advice can help a client, but if we have to justify it with a long report, the cost begins to outweigh the benefit.
    With regard to the exams situation, I qualified 10 or so years ago for the diploma and endorse the need for knowledge. However, taking exams at 57 is a struggle, particularly as many of the answers are strange in relation to the questions set. Cost is also an issue as the CII seem to have forgotten that their customers are also members.

  5. Advice can only be free when there is no ‘product’ involved.

    As soon as you introduce a (typically insurance company manufactured) commission paying product, the consumer will pay dearly over the term of the plan in higher ongoing charges to (often over-) compensate the seemingly generous insurance company who remunerated the adviser when he/she .

    Advice then, is never free when commission is involved.

    The common illusion of ‘free advice’ is fuelled by commission contracts, which can be dangerous.

    Clearly if a consumer is under the misapprehension that advice is ‘free’ when making a purchase, it naturally follows that they will feel that they are receiving good value for money, after all ‘free advice’ is keenly priced! However, the adviser could all the while be receiving an enormous payment for very little work by selling a shoddy plan – not the outcome as perceived by the person ultimately paying for this service.

    If many advisers are still missing this point, then I can see how many more consumers might also struggle, as long as commission products still roam the earth.

  6. Advice is never free. There is no absolutely such thing as free advice. Sometimes it is not paid for by those that receive it, in which case it is simply paid for by someone else i.e. other clients. In the extreme example it is paid for by the adviser because he has no other clients to pay for it, but that is a very short term situation as the adviser will very quickly go out of business. So, there is an element of cross-subsidy. Those that can overpay do, and those that can’t afford advice get it subsidised. This situation diminishes where advice is paid for at an hourly rate rather than by commission, but it won’t disappear. People like Robert Reid proudly proclaim that they give ‘pro bono’ advice to some clients. How can they do that? By charging other clients a lot of money. Enough to allow the adviser a bit of free time to do some good in the community. In other words a cross-subsidy. But it isn’t free.

  7. I gave up providing free advice ten years ago. Those who won’t pay (and for my pre-sale report and recommendations, they aren’t asked to pay a lot) don’t get. My business isn’t funded by charitable donations or by the local authority.

    For implementation, clients can pay either a further fee or by way of a pre-discussed and agreed deduction from the sum they invest. Presenty, the latter’s called commission. Eventually, it’ll be called an Adviser Charge.

    But how can anyone meet the overheads of running a business without charging for it? Unless, of course, the “free” advice upfront is, in fact, a speculative pitch for a commission-generating sale. I won’t do it.

  8. @Alan & others. I’m intrigued at how some of you appear to find find comments by your fellow-IFAs, of which I received several dozen on this subject in the past couple of weeks, not worth reading. Your contempt for other advisers’ views is duly noted, however.

    Not entirely sure what your allusion to 1984 is all about either, unless your face has been chewed off by rats recently. Enlighten us.

  9. “I had expected a massive tirade against my remarks”
    Given that this is your sole raison d’etre, you must have been sorely disappointed.

  10. In response to the comment, “The advice sector continues to be populated by one-man-band, under-qualified, second-rate individuals whose business model is predicated on the acquisition of one or two new clients each month and the necessity for each of these new clients to generate disproportionate levels of commission.”

    I am a one man band and am APFS qualified and working towards becoming chartered. My business is built upon offering good advice with ongoing service and support and does not rely on having to procure initial commisions. I am in no way under qualified or second rate and have purposely chosen to be self-employed rather than work for a bank (where I started) or for a larger firm where meeting targets and generating high levels of commission were the most important aspect of the business. My clients have a choice of commission or fees and there is complete transparency as to the choices they can make. Why should this choice be taken away from them?

  11. Anonymous 12.20

    Why should this choice be taken away from them?

    because a group of employed, third rate, unqualified, target driven men say so!

  12. Anon 12.37

    Exactly! & they are aided & abetted by stupid journalists who are too ignorant to know better

  13. Nic
    I have seen your reply, at, 11:53, but did not nitice an answer to my question about what is wrong with the consumer having a choice. So should I take it that you agree they should?
    By the way, I imagine Alan Lakey was referring to the abolition of free choice by the FSA, Big Brother style, and that Winston Smith would not settle for that. I am surprised that went over your head.

  14. As a 60 year old with over 30 years in the business I do not have a problem with earning a commission for doing business and neither do my clients. In the course of a week I might see one person for a bit of business I earn from but I might see another six to ten for reviews or servicing or advice I do not charge for. I also spend a lot of time at my desk doing other things for clients or go to seminars to learn more. There is no charge to the client for any of this apart from the one I earned from. I am also at an age I find it hard to study and retain information so my choice is to retire early which cannot be right. I know I give good advice and have been using RDR all my days without calling it this.

  15. Monsieur Reynard 21st April 2011 at 1:56 pm

    A friend of mine was recently introduced to his firm’s new FSA supervisor. My friend is QCA level 7 qualified and has thirty – five years experience in the Industry.

    The supervisor has ten weeks worth of intensive FSA induction training, and absolutely no relevant financial services experience whatsoever.

    Says it all really.

  16. Nic have you paid any attention to the advertising around your article, that’s how you are getting paid. So its indirectly biased and I’m not sure we’d pay you directly for your articles amusing though they are.
    Maybe I could festoon my offices with adverts from product providers. The money they pay me will mean the clients can have free advice while being indoctrinated by displayed messages. I could wear a T shirt with “Aegon , 1st in sector for 2010” written on it against a background of a naff little rocket.
    Anyway, “Happy Easter” (brought to you by Liontrust, Thames River, Intelliflow and others)

  17. Can somebody let me know at what precise age it is when it gets difficult to pass exams? I can then make sure that I have passed them all before I get too old!!

    Also, if it is so difficult to remember information relative to passing an exam how do you know whether you have enough information/ expertise to advise a client appropriately?

    Pin, handgrenade…stand well back!

  18. With any luck I will retire in the same week I qualify as RDR ready.
    Why? because I am too old to be sitting exams, but blow me I will go because I want to and not because scruffy little journalists say that unlike them I cannot “hack” it.
    It is also my way of dealing with the snotty nose little alan b’stads at canary wharf.
    working in FS has become about as appealing as working in the politburo and I for one have had enough. So little mr fsa man which magazine nik cicutti et al you can take your rdr and stick…..

  19. @Patrick Schan: a lot of things go over my head, I’m afraid, including people’s personal attacks on me. I probably don’t notice most of them as they’re too clever for me. Just like you.

  20. Anon 2.49
    “Also, if it is so difficult to remember information relative to passing an exam how do you know whether you have enough information/ expertise to advise a client appropriately?”
    Because you have enough grey matter left coupled with enough EXPERIENCE to know where to get the information.
    There is no precise age when sitting exams becomes difficult, any stupid git knows that much. As for you, come back when you are 65 and tell us sitting exams or at least retaining the information required ti sit them, is AS easy as when you were 25, 37, 42 or whatever age your pimples dictate.
    This is age discrimination on a grand scale and no UK business would get away with it in law, but as we all know, the fsa is the the law so do or die.

  21. I probably don’t notice most of them as they’re too clever for me. Just like you.

    You got that right nick

  22. A client ‘phoned this week, wanting me to quote against his long term existing private medical insurance. Talking to him I realised he hadn’t thought it through, probably didn’t need it any more as he’s retired and that the premium he’s already paying is a huge chunk of his pension.

    I could have dressed it up and charged him a fee (probably would have to under RDR), but I sent him away to evaluate his options. I’ll be surprised if we don’t get some commission based income from him soon, but I bet it’s not from pmi.

    Advice might be free at times, but I’ve found enlightened self-interest a big long term business builder.

    What would a banker have done; told him to cancel and take out a new one which excluded pre-existing conditions?

    Now tell me commissions don’t work and fees do!

  23. I don’t see what all the fuss is about when discussing commission and cross-subsidization between clients. Firstly, the Terms of Business letter spells out how we are paid (fees or commission) so the client knows that he is not receiving free advice. Secondly, cross-subsidization is integral to our society – I pay a hefty tax bill each year to ‘subsidize’ people who can’t work or won’t work. I pay tax to help educate other people’s children or provide those children with health care. I run a car that drinks petrol at an alarming rate (paying proportionately higher fuel duty than if I used a more frugal vehicle) but my car doesn’t do twice the damage to the roads that a diesel car does – so I’m subsidising the cost of the roads that other people get to use for less money. Why do I have to pay for my prescriptions, or pay 40% tax when people on the dole get hand outs and free prescriptions ?And so it goes on…….

    No-one has ever put a really good case forward for banning commission. Besides, commission is paid in other sectors of the economy so why not financial services ?

  24. This whole argument of fees and commissions is really becoming quite boring. Commission is a method of paying a fee that otherwise would have to be charged to the client. It is a convenient method of ensuring we are paid for the advice we give but it is the IFA that should be setting this charge not the product provider. Just because an insurance comapny is willing to pay 7% commission doesn’t mean that IFAs have to take it. Ever heard of commission sacrifice? Those IFAs who depend on maximum commissions have the wrong business model and possibly ethics and it will be no loss to our industry if they leave.

    Yes, the loss of indemnfied commission for regular savings, whether into a life policy or pension, still exists and it is this issue that still needs to be resolved as all advisers have to be paid for their initial cost of advice. Unless this aspect is resolved, the arguments will continue to rage on. For lump business however, the issue of commission v fees is pointless. The cost comes from the clients money – call it a fee, commission, client agreed remuneration is up to you. If you have clients who won’t pay fees, then you have the wrong clients. We all have them but we need to be firm with them and adapt our business models. There is no point blaming everyone else when you have the power to shape your own destiny. Exams, qualifications and the ability to demonstrate the true value of your advice will help you make that change.No one said it will be easy but you need to manage your business, your skills and your clients to succeed.

  25. By not charging a prospective client at least something for your advice, you’re giving away the central commodity offered by your business, albeit an intangible one. Therefore, by providing the other party with something of value without asking them to pay for it, you’re effectively paying for it yourself. How can it be otherwise?

    Why, unless you’re pitching unashamedly for a commission-generating product sale, would anyone do that? How can it make sense to provide your time and expertise and advice on the basis that the client can simply walk away without paying anything for it if s/he should decide not to proceed with your product recommendation?

    Okay, a number of prospective clients will cancel that first appointment when you inform them that any work they may ask you to do for them thereafter will require payment of a fee, even if it isn’t a very large fee. But an increasing number of prospective clients, I find, are willing to accept that advice and other pre-sale work has to be paid for. So why bother with those who want the benefits of your services with no obligation to pay for them? Is it cost-effective to provide your services on a speculative basis, knowing that only some of the people to whom you provide them will proceed with your recommendations? I suppose it all depends on your conversion rate, but for some clients you can find yourself doing a great deal of pre-sale work and end up getting paid nothing for it. In this day and age, I just don’t see that as a viable business model.

  26. I’d like to look eveyone to consider more Julian Stevens | 26 Apr 2011 10:40 am issues

    I suspect many pro RDR adviser put Julian and I in the anti RDR brigade, often referred to as the “naysayers” and yet I don’t think eitehr of us are anti anything other than dictation.

    I am not pro commission, not am I anti exams. My hole focus in blogging about RDR is to look at the purpose and advantages of things and whether they are a good idea.

    There is no proven case for banning commission. There may be a proven case for improved qualifications (but not for a cliff edge withoyt any form of grandfathering and I don’t want it for me as I am 46 and on the way to level 4, so the only ereason I want to see grandfathering is becuase I think without it in some form will be detrimental to the consumer and the FSAs OWN research confirms that it will be in the long term.

    As I said, the case for banning commission is unproven. Advisers who believe that fees are a good idea should be offering proof of why that is the case and ironically it is people like Julian and I, whoe are anti banning (I think Julian is anti banning) have given examples of why charging fees are a good idea for the adviser and client.

    For me, we define whetehr we are giving an ongoing service by charging a (modest) ongoing retainer fee. It does not matter whether this is £1 per month or £100 per month, the client is paying a fee for our ongoing responsibility which obliges us to advise a client when to take action and teh example of the Private Medical Insurance is an example of where an ongoing fee has it’s uses for client and adviser as we would be obliged to advise them (when asked to consider the PMI) that it may no longer be appropriate to their needs or to re-prioritise their budget. By advising we are taking risk of a claim for proffessional negligence and as such we need to be paid even if it is £1. In law where there is no offer and accptance (money passing hands), there is no contract. By paying us for a specific service, a contract exists with the client and we know we are liable. No payment and that would be the first thing we’d say in response to a complaint about advice (not given or paid for), which would have been simply a discussion abotu issues.
    It also means that first meetings with a new client to get a feel for their needs and whetehr we want to work with the client (and vice versa) where issues may have been mentioned should not form a claimable contract again as no payment has been made. Review meetings with exisitng clients do not require sale of a product for our contract to remain in force and should role forward any proffessional negligence longstop (15 years) at each review, but if the client stops the retainer, I feel we can legitimately argue to the FOS (and because our Client Agreement explains the longstop whetehr FOS choose to ignore it or not) that by stopping payment, the client has either accepted respobsibility for their own advice or obtained a new adviser and hence a longstop should apply 15 years after the client agreement is terminated.

    Sorry for rambling a bit, but I got interrupted by client phone calls whilst typing this and lost my train of thought.

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