From the end of 2012, commission-based investment sales will be outlawed.
One single factor has underpinned almost every mis-selling scandal over the last 25 years. It is the financial services industry's very own c-word, commission.
But under new rules issued last week, commission will be banned for good by the Financial Services Authority from the end of 2012. Commission will be no more. It will cease to be. Happy now?
Cold turkey from 2012
I certainly am. It was commission that motivated financial advisers to persuade millions of workers to swap perfectly reasonable company schemes for inferior personal pension alternatives in the 1980s and 1990s, and that was only the start. Commission has been a contributing factor to millions of corrupt investment product sales, from unnecessary pension transfers to shockingly pricey with-profits bonds and endowment plans.
Despite the furore sparked by these many mis-selling scandals, advisers haven't been able to stop themselves. While a far-sighted minority have embarked on a tricky but ultimately more rewarding journey towards a fee-based service, too many remain dangerously addicted to their commission fix.
As recently as 2008, an FSA survey found that commission paid to advisers to encourage their clients to switch pensions costs consumers a mighty £43 million a year. In 2007, average initial commission chewed up a whopping 5.6% of the sum invested.
Owt for nowt
Commission has also distorted people's attitude to independent financial advice. If you don't physically scribble out a cheque to cover your adviser's time and expertise, it is easy to convince yourself the advice you receive is free, or paid for by the product provider (rather than by you).
You would never expect a plumber to visit you home for nowt, but some people expect a financial adviser to do so. And because their time is "free", they value their advice less, and are shocked by the idea that they might have to cough up £75 to £150 an hour for the service of a trained professional.
It has been in the interest of both adviser and client to pretend that this is a cost-free transaction, which means the entire relationship is built on deception and self-deception. No wonder there have been so many scandals.
Brave new world
So what will happen from 2012? The new system is part of a package of FSA measures catchily titled the Retail Distribution Review (RDR in the biz) that is designed to restore consumer confidence in the investment market. Advisers who sell investment products, pensions and life insurance must charge directly for their services, and tell you whether they are offering "independent" or "restricted" advice.
Firms that offer independent advice must show that their recommendations are based on a comprehensive and unbiased analysis of the market, and any products chosen are in their clients' best interests.
If they limit their choice of products to certain investments or strategies, they must clearly explain right at the outset that they are offering restricted advice.
The aim is to bring transparency where before there was only murk, gloom, shadows and self-deception, but it is also an admission that previous FSA attempts to tackle this issue backfired (and in a very predictable way).
Don't tie me down
Just a few years ago, the FSA controversially chose to split financial advisers into three camps rather than two: tied agents, who can only advise on one company's products, multi-tied agents, who could sell products from a limited panel of companies, and full-blown independent financial advisers.
As many people warned at the time (me included!) the system seemed designed to baffle customers, allow dodgy advisers to strike lucrative commission deals with their panel of multi-ties, and help unscrupulous banks blur the line between tied and independent advice.
And that was exactly what happened. It also left those honest advisers offering whole-of-market advice at an unfair disadvantage to those with fewer scruples.
Cop-out
The FSA was accused of caving in to pressure from the big bancassurers then, so has it got it right this time?
Worryingly, it hasn't entirely learnt from its mistakes. Under pressure from the restricted advice sector, last week's policy document scrapped a sensible proposal that advisers must use a fixed set of FSA-scripted words to disclose to clients that they aren't independent. This leaves plenty of scope for advisers to be creative about how they misdescribe the services they're selling you -- and when money is at stake, we know how creative advisers can be.
The FSA says the new system will be policed by mystery shoppers. I hope they're heavily armed.
Boost your investment pot by 5.6%
The FSA has also muddied the waters on how customers pay for advice, but with more justification. If you can't afford to pay for advice upfront you can bundle the fee into the cost of the product you are buying. Just make sure your adviser doesn't try to persuade you, and you don't try to persuade yourself, that the advice is therefore free.
If you want individual specialist advice, you have to pay for it. Don't kid yourself that you can get it for free, because you can't, and don't let your adviser kid you either.
That doesn't mean you have to take advice. You can always go it alone, and plough the fees you save back into your investments. That means an extra 5.6% goes into your investments rather than the adviser's pocket, giving you an instant edge, and that's before compound interest starts working its magic.
That might be the best advice of all. And it didn't cost you a penny.
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