Commission is dead! Long live the fee!
Most of us prefer to pay for commission for advice than a fee. Soon we won't have a choice.
For years I have derided unscrupulous financial advisers as "commission-hungry salesmen", but soon I will have to find a new term of abuse. That's because new proposals to radically shape up the industry will make paying commission to your financial adviser a thing of the past.
It is all part of the FSA's Retail Distribution Review (RDR), which hopes to revive our confidence and trust the financial services industry, and put a stop to the torrent of mis-selling scandals.
Financial services companies are to be banned from paying advisers commission to sell their products, and in turn, advisers will be banned from selling us any product that pays commission. So we will have to pay them a fee instead.
Non-commissioned advisers
The regulatory authorities have been nudging advisers towards charging fees for years, but now this is the final push.
And it has to be a good thing. It means an end to commission bias, the suspicion that an adviser is recommending an investment not because it is best for us, but because it pays the most commission.
The pensions mis-selling scandal, to name just one, was largely fuelled by greedy advisers aggressively recommending what was good for their finances, rather than their clients.
Removing the financial disincentive to give honest advice can only be a good thing. It should help to curb the more extreme antics (I had better say this while I still can) of commission-hungry tied salesmen.
Costly coffee
A few years ago, my girlfriend got to know the wife of a tied insurance salesman. One day over coffee she cheerfully told my girlfriend that a widow had walked into her husband's office asking for advice on how to invest an inherited lump sum of £600,000.
I wasn't exactly a big pal of the salesman (we were suspicious of each other's chosen careers), but I did know the majority of his clients paid commission rather than a fee.
If the wealthy widow did likewise, he could have earned anything up to 7% commission from the insurance bond he sold her. Or to put it another way: £42,000. I would have thought a fair fee for the work would have been in the region of, say, £1,500. So there is quite a discrepancy there.
Sadly, I never asked ask how much she paid for his services. But his wife did pick up the tab for the coffee that day, and a slice of cake.
I'm not paying that
In future, the commission-hungry salesman (I've said it again!) won't pocket tens of thousands of pounds for very little, and my girlfriend will have to buy her own coffee. But as ever with progress, there will also be casualties.
The first problem is that most people actually want to pay commission. As many as nine out of 10 of us prefer it to paying fees.
Most people can't believe their adviser is entitled to charge anything between £50 and £250 an hour for their wisdom. My God, that's almost as expensive as a plumber!
Many also don't like the fact that the clock is ticking for every minute they sit in his (or her) office. That cosy "getting to know you" chat about your family holiday is coming out of your pocket. And having commission silently deducted from your investment is much less painful than writing out a cheque.
Please fees me
An even bigger problem is that the people who desperately need financial advice are those who are likely to be most reluctant -- or unable -- to hand over several hundred pounds to pay for it. So all those people who desperately need advice on starting a pension may be deterred from doing so.
The FSA says this shouldn't happen, because we still have the alternative of spreading our fee costs over a long period, rather slapping down all the money upfront. But I would argue that even if it does put a few more people off, at least those who do make the effort should have greater confidence that they won't be fleeced her.
It's still a jungle out there
This doesn't mean that all advisers will instantly become legal, decent, honest and truthful.
Tied advisers may still be paid more for selling more, giving them a clear financial incentive to sell unsuitable products to customers. But even here there is hope. The FSA has mooted a new code of practice on remuneration, although that is still up for discussion.
The final worry is the cost of the new system, which the FSA calculates will cost £430m initially and £40m a year thereafter. That could come out of our pockets, particularly if investment managers use it as an excuse to jack up prices.
The financial services industry always seems to find a way of coming out on top in the end.
They still have three more years to fleece you
So if you pay commission for investment advice now, prepare yourself to start paying a fee. The growing army of a "new model advisers" who exclusively charge fees say they initially met resistance from existing clients, but found people valued advice more when they directly paid for it. So that is something.
I'm being a little premature. The change isn't due to come in until 2012. So I still have a couple more years to abuse those commission-hungry salesman. I promise not to waste them.
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