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The transparent truth

The endless debate over commission versus fees obscures the fact that what is really needed is complete transparency of consumer charges, says Harry Katz, principal of Norwest Consultants.

I suppose it is too much to hope that the latest round of soul-searching on commission versus fees will be the last.

If it became mandatory for all advisers to charge fees, would that really be all advisers? Would banks direct salesforces, single ties and multi-ties be included?

If up-front commission were done away with, would that not also skew the playing field as big outfits such as banks and insurance companies have the pockets to fund their advisers.

In the interests of a full discussion I would like to pose some what-ifs.1: If it were only those who wanted to call themselves independent who had to charge fees, this would be tantamount to reintroducing polarisation. If this is the intention, then it needs to be rigorously and scrupulously controlled. None of this nonsense with Barclays et al.2: What if fees were mandatory throughout all the advice process?

Overall,l I think it would be wonderful for the existing independently regulated IFAs. The big networks which are turning themselves inside out to show that consumers do not want to pay for advice, will suddenly discover they cannot control their cashflow.

As for clients, this will be interesting as the Government and Opposition are already bleating about financial exclusion. If people cannot get financial advice other than through a feepaying channel then of course it is only going to be the more enlightened and better off that are going to have any advice anyway.

Just imagine how term insurance sales would collapse if fees had to be charged.3: If the banks also had to charge fees then unless they were going to subsidise this heavily it would soon become evident that their prices were way out of line with prices offered by smaller IFAs.4: How will the traditional life offices fare? They have been emasculated over the past decade. This would probably be their death knell.5: Are unit trusts to be included? If so, I trust that stockbrokers will also be weaned off commission.6: If no commission is taken, will the full value be stripped from the product? Methinks perhaps not and the providers will enjoy fatter margins at the expense of the adviser and the client. Alternatively, judging by past performance, will the providers be daft enough to enter into a downward spiralling bidding war, thereby jeopardising their own solvency yet again?7: Under TCF considerations, how long will it be before the FSA tries to control the level of fees charged?

Why can’t everybody accept that we have some pretty effective regulation, so stop fiddling and let it bed down for a few years.

For those who bleat on about professionalism I can only say, open your eyes. Those whom you claim to want to emulate, such as solicitors and accountants, have their black sheep and those that dispense less than perfect advice.

That is what regulation is for – to make sure that any rogue business is the exception rather than the rule. I would contend it is not there to ensure that faults do not happen at all because that is an impossible task.

All this talk of commission is nonsense. What is really meant is absolute transparency of consumer charges. If the regulator believes this is not already extant, then what on Earth are we sending out all this paperwork for?

It is tantamount to the FSA admitting that key facts and menus have been ineffective and a waste of time.

Currently a fee-based adviser can offer clients the option of letting the fee be recovered by commission if a product is the result of advice.

In many cases, the commission equating to the fee is significantly less than the full commission on offer.

The marginal difference is therefore available for the benefit of the client and often this benefit is considerable, thanks to the generosity of the life office. Are we going to jeopardise that? Also, by this means, advice for pensions can attract tax relief where a pure fee cannot. If the Government is daft enough to have these anomalies, then why blame the commission system?

What is wrong with just saying in the written advice that If I provide this advice or that product, you will pay X amount? How difficult is that?

The regulator goes to great lengths to prescribe every dot and comma but requires no evidence that the client has received this dross. It seems more concerned with protecting its copyright than ensuring a simple and foolproof way of achieving true transparency. If this is achieved, then who cares whether fees or commission is taken?

What the whole thing boils down to is:

a: Our regulator does not trust us to be open, honest and straightforward with our clients and customers. A mountain of paper and interminable soul-searching is not the answer.

b: The really broken model (apart from traditional life offices) is the network system. Networks have distribution muscle. The life offices rely on them for survival. Their model of doing business makes commission an imperative. They are the new direct salesforces.

I would contend that small. directly regulated IFAs do not have a problem with fees versus commission. This sector seems to be solvent, profitable and offers customers a decent, cost-effective deal, whether by commission or fees.

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