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Who has the better pay plans for IFAs?

Much has been said about the pros and cons of the defined-payment system proposed in the FSA&#39s CP121 paper compared with the Sandler review team&#39s thoughts on the subject.

Various parties have offered different interpretations on the merits of each proposal and how they will benefit or damage the IFA sector. The prevailing opinion until the publication of Sandler in July was that the DPS, as outlined in CP121, would result in the death or at least the crippling of a vibrant and healthy IFA sector.

For once, the industry appeared to be united in fighting the FSA and, in fact, appeared to be winning as the latest pre-Sandler noises coming out of Canary Wharf were that alternatives to the DPS were being considered.

Enter Sandler, with his own ideas of how IFAs should be remunerated and that unity suddenly came to an end.

In his own words, the proposals are a “substantial relaxation” of the FSA&#39s DPS proposals and this is how many in the industry have greeted them.

Clerical Medical pensions strategy manager Nigel Stammers says: “Certainly, Sandler is a big improvement on the FSA proposals. It offers two improvements – payment dependent on sale of a product and payment can be based on the contribution level.”

Many agree – but not all.A dispute is emerging as to the extent to which Sandler is actually an improvement on the DPS.

On one side of the fence are Aifa, Sofa and most of the IFA providers which are publicly talking about Sandler.

On the other sits the LIA and some IFAs.

In a letter to Money Marketing this week, LIA director of public affairs John Ellis outlines his arguments against Sandler. He says: “I keep hearing people in the industry saying “we accept major change has to take place&#39. Why? I am the first to believe if we can get to an improvement on current arrangements, then we should do that. But why do we have to have change for its own sake?”

It seems undeniable that the powers that be are convinced of the need for change.

Stammers says: “Any initial mixed feeling was likely to be due to the fact that IFAs were comparing Sandler&#39s proposals with the current commission arrangement, against which, his ideas do appear restrictive. The industry must compare Sandler with the DPS as it seems that certain change will occur.”

Ellis&#39s argument appears to have two strands. First, that while the DPS would allow commission still to exist as long as it was offset against a fee, Ellis believes that, under Sandler, commission would be scrapped altogether.

Second, Ellis says Sandler expects IFAs to negotiate the price they charge for a particular service with their clients, a skill he does not believe they are used to.

To the first point, Sandler does say quite clearly he does not believe the independent sector should be allowed to continue to be remunerated through commission.

But he then goes on to say two of the possible payment options are instalments as a percentage of the initial investment or of the assets under management, similar to commission and trail as they exist today.

Once a fee is negotiated and a method of payment is decided, in most cases, a cheque would still be sent off to the provider which would then act as a conduit for the remuneration of the adviser.

This gets around the problem that the majority of IFAs are not authorised to handle client money.

The primary difference then between today&#39s commission and Sandler&#39s propo-sals is the fact it would be made very clear to the consumer that they are paying and the provider has no say in how much the adviser is paid.

So, Ellis is right, commission as it exists today would be scrapped, but a similar model to it would replace it under the new regime.

Momentum Financial Services development director David James says: “A lot of commentators have been saying Sandler does not allow commission. I think what he is saying is there should be a tripartite negotiation between the adviser and the client and then a factory gate price from the provider. This is a more sensible solution than the DPS.”

The LIA&#39s other main concern is the fact that IFAs would have to negotiate actively with clients as to how much and how they are going to be paid. This one does not seem to hold much water in the eyes of many advisers as they say they spend their entire careers in negotiations.

Heartland Independent chief executive Tony Weaver says: “I think IFAs will be able to negotiate proper payments without a problem.”

But Ellis does have support in some quarters where the belief is that, for most IFAs, especially those at the lower end of the market, negotiating will be yet another obstacle to overcome.

Wentworth Rose managing director Philip Rose says: “It is a new problem for advisers because many of them will not be used to negotiating with clients. It is a technique which can be learned but it will have a nasty bit for the lower-income adviser.”

One argument coming to the surface lately in favour of Sandler is the whole issue of fee-based advice being subject to VAT where no product is sold. In the Sandler report, the issue was dealt with extensively but the FSA did not appear to take this into consideration in its paper.

Sandler seems to sidestep the issue with the no product sale, no fee contingency, whereas the FSA expects every independent adviser to move towards fees without dealing with what many feel to be the biggest barrier.

Syndaxi Financial Planning principal Robert Reid says: “Sandler has the better thought out proposals because I do not think the FSA even considered the Vat issue. His proposal is logistically a lot more capable of being implemented.

“It is naive to suggest that Customs & Excise will take Vat off fee-based advice where no product is purchased. Even if they wanted to, the European authorities would not allow them to do so.”

This is why Sofa, whose IFA membership tends to be at the higher end of the independent sector and more open to fee-charging, is in support of Sandler.

Sofa chairman John Porteous says: “One of the main issues of Sandler is if the situation on Vat is addressed. If it is possible to get around it, then Sandler&#39s proposals are far more att-ractive than anything that the FSA has had to say.”

•Letters, p26


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