It was recently suggested that repolarisation is effectively taking place and the FSA should recognise that there are two camps of advisers within its regulation – fee-based and commission-based.
By dividing advice into two definitions, with fee-based being independent, we would create an impression in the eyes of the consumer that fee-based advice always equals better advice. Or, worse, commission-based advice is inferior, if not always biased.
If an adviser charges fees, then commission bias has been taken out of the process.but you also take a significant proportion of the population out of the advice process.
If the consumer is led to believe fee-based advice is better quality, this may deter those who cannot afford or do not want to pay a fee from getting independent advice. This is akin to creating toll roads that are so expensive that only a limited number of drivers can afford to use them and then saying that these people are better drivers by virtue of there being fewer accidents. Under this argument, only people who can afford to pay the tolls should be allowed to drive.
For consumers who would prefer not to pay fees, the alternative is attractive. Buy now, pay tomorrow. Commission is like a loan from the product provider to the client, which is recovered over a number of years and used to pay the adviser. Pretty much how consumers buy most things. If you ask a client to pay 1,000 in fees now or offer to spread the cost, most opt for the latter. Then tell them in the case of pension advice, if they pay up front, the 1,000 will actually cost them up to 40 per cent more because they would get tax relief if the policy paid it and the game’s up.
You have to accept that commission bias does exist and where it does, may lead to a poorer quality of advice. You also have to accept that fee-charging creates an advice-based culture and those advisers are more likely to offer products that do not bear commission, such as premium bonds. Some products pay too much commission and although there is now a strong trend for commission to be sacrificed to create consumer benefit, high commission levels can lead to churning.
The consumer needs a mechanism to spread the cost of independent advice if they are to be encouraged to save. The problem is the way it is paid and the amounts and the solution may rest with the product providers.
Commission is used by providers to sell products. This is a sound commercial practice but leads to bias. Bias can be ok if it has no negative effect on the client’s benefits and is simply a provider profit sacrifice and the move by some providers to offer product at wholesale prices, leaving the amount of commission payable up to the adviser, is a positive step.
If the client were made aware that the adviser is choosing the level of commission, we would reach a satisfactory compromise between the fee that most consumers do not want and spreading the cost, which they do. In both scenarios, the adviser will have to justify his costs.
Commission needs to be more transparent and shown as part of the product cost rather than disclosed in isolation. The industry needs better mechanisms to monitor problems caused by commission bias, including education for the adviser. Closer monitoring by the regulator could also be an option but does not sit well with principle-based regulation and is costly. And more effective monitor-ing from providers could also be implemented.
To revert to my initial point, dividing the industry into two camps and labelling one good and one bad is unhelpful. What the discussion around different models of providing advice ignores is that the measurement of the standard of advice should not be whether a fee or commission has been charged but should be based on the output – the advice.
Simon Hudson is group chief executive of Tenet