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Why are they itching for a fee circus?

We are probably in the most challenging debate about the way that financial advice is offered since the introduction of polarisation in 1988. We need to be crystal clear about what is intended in CP121 and the Sandler report.

First, let us look at the question of IFA remuneration. CP121 suggested a defined-payment system. This was essentially a fee basis but underpinned by commission. You present the client with a number of possible fee options but, where agreed with the client, you offset commission against the fee.

What about clients (the majority) who are quite happy to have IFA costs bundled into the product – that is, commission – with no mention of a fee?

“Hard luck,” says the FSA.

“Just add a commission-only option to the list of ways of paying for advice,” says the LIA.

The Sandler report goes a step further. It says in paragraph 10.63 that “advisers would receive no payment from providers for their advice”. The idea is that the IFA would give clients a “tariff sheet” setting out charging options for IFA services.

These could be an hourly fee, a fixed fee, a percentage of the initial investment in the product, one-off or an ongoing instalment basis. You can permutate the options as you wish. But there is no offsetting commission. It is all fee.

This fulfils the essential Sandler objective of making the payment for advice an issue between the client and the adviser, without provider involvement.

Of course a large number of consumers do not want to pay fees. Even if the “mark-up” on a wholesale price now proposed for the IFA to charge to the client were made to look like commission – would the Sandler fan club allow this – there would still be the issue of justifying it to the client.

IFAs who at present do the business without much concentration on their own remuneration, would find, under the new approach, receiving any income, initial or ongoing was an issue with the clients. What about those renewals?

We in the LIA think this approach is such a radical change that it is likely to cause many IFAs to move to a different status.

Of course, as Sandler himself says in paragraph 10.85, IFAs have the opportunity of dropping the title “independent” and “adviser” (reserved for the fee-chargers) and becoming a multi-tie or distributor firm.

The commission issue runs like a thread through other Sandler proposals and indeed parts of CP121.

If the Government devises a new range of stakeholder-style products, as Sandler suggests, sold by unqualified distributors with no suitability or know your customer requirement and these products have a 1 per cent charging cap, we could see those who remain on a commission basis having their remuneration severely cut.

This is not just in the case of those who are selling the new-style “simple” products – the reduction in charges and commission could well infect other products. Surely, we must rethink the charge cap, at least raising it to 1.5 per cent.

What this all adds up to is a full frontal attack on commission payment. Whatever we may say about commission, it has incentivised the sale of products to the public. There is scant firm evidence that there is serious bias in the offering to clients as a result of commission and clients mostly are happy with it.

We need to see these issues with clarity. It is all too possible that words can be misused. For example, I keep hearing that a positive aspect of Sandler is the acceptance of the “tariff sheet”. But if a menu is offered, we need to know what is on the menu. So if you hear anyone talking about a tariff sheet or menu, challenge them to say whether it contains any real choice.

There is a very great danger that, if the prescriptive approach offered in CP121 and Sandler is adopted, we will undermine the advice market. Then there will be far less saving, far less purchase of pensions and protection than at present. The Govern-ment obviously do not want that outcome. They need to work with us to make sure that the outreach of financial advice is maximised.


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