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Their mooted changes will end the ability of millions of middle and lower earners to obtain independent financial advice. For a country which currently suffers from a 2.3 trillion protection gap and an even wider retirement gap I would go so far as to say the the RDR constitutes economic and social vandalism
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What I find most galling though is that bank-based advisers – those primarily responsible for PPI misselling, endowment misselling, investment misselling and generally poor advice all round are still to be allowed to be remunerated based on the number of sales.
So bank advice, which as they can only look at a limited number of products, will become known as “restricted advice” (though it’s often far closer to sales tactics than advice) will be free and commission remunerated; yet you’re going to have to pay a fee to get a cross-market comparison. This seems to me a bias in totally the wrong direction.
Well, not really surprising when you look at who makes the FSA. James Crosby (the one who resigned as deputy director after it emerged when he was at HBOS he fired the guy who correctly said their lending was unsustainable) was a banker. Is that appropriate for the body that is supposed to regulate banks?
Where is James Crosby now? Enjoying his vast amassed fortune on an island somewhere no doubt.
Of course the FSA were never going to come down hard on their little pets (the banks). On a slightly unrelated but relevant topic, notice how the banks can still charge customers penalty fees for overdrafts yet consumers can't reclaim them because of the 'FSA waiver'. Why is it a one way waiver strongly in favour of banks and against consumers?
The FSA will continue to be a laughing stock until it's run by people who don't have strong and prominent past connections with the financial industry.
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Any and all regulations promulgated by the FSA are subject to the continuing scrutiny of the Office of Fair Trading (OFT).
An extract from the OFT website reads:
- Our job is to make sure that consumers have as much choice as possible across all the different sectors of the marketplace.
- When consumers have choice they have genuine and enduring power.
The last major attempt to control commissions was ruled out by the OFT. Whatever the arguments for and against in this latest attempt by the FSA it is clear that:
- consumer choice is being limited
- that the impact goes beyond choice over commission or not
- namely it is all too easy to see that it will lead to an inevitable reduction in choice over how and who provides independent financial advice.
Are the OFT happy to see market restrictions and price controls? If they are, perhaps it is time they told us.
If many little people, in many little places, do many little things,
they can change the face of the world.
- African proverb -
Most IFA's are NOT biased when it comes to commission!
I work for an Independent Financial Adviser and would like to put the record straight. We do not charge fees, we are paid on commission. But in this business, reputation counts for a lot. My employer most certainly DOES NOT recommend mortgages based on commission rates. She often gives advice for free and doesn't make a penny, and if there is a better mortgage elsewhere that she cannot arrange, she will tell the client. We get most of our business through referrals from our current clients, so honesty is very important. My employer has built up a fantastic reputation because of her honesty and good advice, and that is what has helped her struggle through these difficult financial times. We are strongly regulated, and it is our job to show people what choices they have and recommend the best deal for THEM, NOT how much commission we will make. We have to justify to a regulating authority exactly why we have chosen a certain mortgage deal and so there is no room for bias, nor would my employer ever dare to be commission biased, because her business depends on her good reputation. She has been in the business since 1988 and most certainly would not have survived this long if she was a biased adviser.
I agree that forcing IFA's to charge a fee might put people off seeking advice at all. But I don't take Martin's view that keeping commission is a lesser of two evils. We do this job because we want to help people and give the best advice, NOT because we are money-grabbers. I would have chosen a different career if that was my real aim in life.
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I agree that forcing IFA's to charge a fee might put people off seeking advice at all. But I don't take Martin's view that keeping commission is a lesser of two evils. We do this job because we want to help people and give the best advice, NOT because we are money-grabbers. I would have chosen a different career if that was my real aim in life.
Please don't think I'm saying all non-fee IFA are commission biased, yet we know commission bias does occur. I'm sure you will agree that this does happen in some places. The fact that when commission is increased more business is done for those companies is a level of evidence.
I do think commission bias - when it happens isn't a good thing, but its syllogistic to say that you can read that to mean all commission bias is evil. What it means is when commission bias occurs its wrong - but not that all commission IFAs are commission biased. (a bit wordy but hopefully you get the point).
Martin Lewis, Money Saving Expert.
Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.
It is already recognised as fact (Oxera Consulting's report to the FSA - on the FSA website) that we may see "bias" over commission levels being replaced by another form of "bias" over what are called FGP's - "Factory Gate Prices".
Removing a "commission" element from a product should, stress should, reduce its actual cost - ie, if the product manufacturer no longer includes commission as a cost it should produce a lower "Factory Gate Price" for that product.
But ask yourself - what were the commission enhancements that created any bias intended to produce?
It was simple - a greater volume of sales.
Now ask yourself - does that desire/need for a greater volume of sales by the product providers vanish simply because "commission" is no longer a factor for them to use to create any bias?
IMHO - No it doesn't.
So what might the product providers use to once again stimulate greater sales volume.
Probably a variety of "dual" pricing as seen fairly recently in the mortgage market, but perhaps with one variation - sales volume will, as in most other markets, reduce the "Factory Gate Price" for those able to supply that greater volume. I pay more to buy my one car, than Hertz do to buy 100's.
So what is hoped may reduce or eliminate "commission bias" may well be replaced by another bias, one which may well prove far more destructive for the consumer seeking independent advice than commission ever was.
So the bigger the level of sales, the lower may be the FGP - what do you think will happen - nobody will be tempted to gear their offerings to one particular provider or two?
So is removing commission a panacea? Or the route to potentially worse forms of bias?
Well, just for a second think of "Equitable Life" who championed the idea of not paying commission to outside parties, that worked well, didn't it?
If many little people, in many little places, do many little things,
they can change the face of the world.
- African proverb -
Last edited by *MF*; 01-07-2009 at 2:12 PM..
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Would this ruling affect the MSE website's funding approach? If so, then surely this article should disclaim its bias in the subject matter? Apologies if this isn't the case.
For the record, I feel that MSE consistently does a good job of avoiding commission bias, although it still troubles me occasionally (e.g., in the order that comparison site options are listed).
I work for an Independent Financial Adviser and would like to put the record straight. [..] We do this job because we want to help people and give the best advice, NOT because we are money-grabbers. I would have chosen a different career if that was my real aim in life.
Oh come now Isla - can you really hand on heart say this is the norm for the industry?! Even if individual advisor staff with hearts of gold aren't swayed by the commissions dangling on offer, their employer's are likely to steer recommendations toward more profitable suppliers, even if subtly via training approach, on-site available literature, etc.
I'm going to suggest that the average IFA doesn't provide advice out of the generosity of their hearts - they are a commercial business after all, with bills and staff to pay.
I read your blog with interest. A couple of friends of mine are IFAs (I’m not but I do use their services) and they are both furious and in despair about the attitude of the FSA towards small financial advisors. They firmly believe that the FSA want to drive smaller providers out of business because they are administratively too much trouble to bother with. They add that the new rules will strongly bias financial provision towards the big players, who will still be able to be paid by commission.
The following is a summary of their points:
1) If payment by commission is such a bad thing, why will large institutions such as banks still be able to charge commission to their customers?
2) Payment by commission used to be governed by the Maximum Commissions Agreement, which put a cap on the commission that could be charged. Why aren’t bank commissions going to be capped?
3) All IFAs, even the most experienced with long track records and spotless records, will now be required to pass extensive exams to stay in business. Why is the FSA not following the lead of other professions, such as accountancy, and allowing great experience as a qualification in lieu of exams? The IFAs believe requiring new entrants to financial advice being judged by exams is sensible.
4) To remain as an independent, an IFA will be required to provide what is called a “Whole of Market” service. In practice, it will be impossible to any individual to know about the whole of the market across all the many thousands of products on offer. This will mean that specialist IFAs – and there are many who specialise in one part of the financial services market and do not sell any other services – will be put out of business.
5) Forcing IFAs onto a fee-only basis will exclude everyone who cannot afford the up-front fee for independent advice. There is a tentative proposal to spread fees over the lifetime of an investment but that would cripple the cash flow of many IFAs. Either way, the result would be to drive people into the hands of banks selling only their own products or people may buy entirely the wrong financial products.
6) Transparency is good, so why not allow customers the choice of paying by fee, commission or a combination of the two, as is current practice? Providing the customer knows what the charge is for what service, what is the objection?
7) IFAs have been required to disclose their commissions for a long time – but this has not put off people using them. Again, where is the problem?
8) The proposals are likely to result in direct sales forces from big players being resurrected, to mop up business as IFAs go to the wall. As the experience of the 1990s shows, this is likely to result in mis-selling or poor deals for the customer.
9) Across the whole financial services sector, IFAs have the lowest level of complaints. Why is this not taken into account by the FSA as an index of consumer satisfaction? It is not included in the FSA’s “Treating Customers Fairly” regulations, even though records of complaints directly correlate with whether a company is treating its customers fairly.
10) The cost of these changes will be more than the annual cost of regulating the entire financial services industry: around £420 million, with £40 million a year to run on top of the current FSA annual budget of around £350 million. Who is going to pay for this? Customers. One IFA tells me he earns £65k gross. Of that, the FSA charged him this year £4,825 in fees, up nearly 15 per cent. He expects another increase of around 20 per cent by 2012.
11) The FSA has refused to apply the 15-year rule to IFAs. This is where businesses can destroy their records after 15 years. Instead, all IFAs will have to store mountains of documents until they day their die, again at huge cost. Why?
My apologies for going on at length but the issue is an important one and one that is unreported. Thank you for bringing it into the open.
If my friends are correct, there is a serious danger that the FSA is going to lock out millions of people from properly independent financial advice while at the same time forcing millions of others to buy financial services from banks or tied providers. The playing field will be tilted so that there is punitive regulation for small players and light regulation for big ones. And we know where light regulation of big financial institutions has got us.
Martin - I understand what you are saying, but I am worried normal people might get the wrong impression about IFA's from your blog. Yes, there are dishonest IFA's who are commission biased, but they usually don't last long in the industry. My employer has been doing this since 1988. I just don't want your blog to put people off visiting an IFA. My advice would be to ask around - if the IFA you are interested in seeking advice from has a good and well-known reputation, you're probably onto a winner.
Ben - I appreciate your cynicism but don't tar all IFA's with the same brush! I'm not in any way a deluded employee, I know my boss is bloody good at what she does, and from the amount of clients she has to turn away because she can't offer the best rates, whereas a bank can, I know she is honest! I most certainly haven't been subliminally brain-washed! Plus, as I said, IFA's who give dishonest advice don't last long in a career which relies heavily on a good reputation.
And Ben, commissions don't affect my pay whatsoever! Of course we don't just work out of the goodness of our hearts, we all have bills to pay, but good old-fashioned honesty goes a long way in this business!
Hi KK - thanks for the insight into the difficulties IFAs are facing as small business owners - this is certainly something I can sympathise with, and it would definitely be a shame if this move resulted in less small independents that are good at what they do.
Quote:
Originally Posted by KennyKoala
To remain as an independent, an IFA will be required to provide what is called a “Whole of Market” service. In practice, it will be impossible to any individual to know about the whole of the market across all the many thousands of products on offer. This will mean that specialist IFAs – and there are many who specialise in one part of the financial services market and do not sell any other services – will be put out of business.
I disagree with the above, however. If I contact an IFA to ask about mortgages, for example, I'd damn well hope they'd point me toward the best deals available on the whole mortgage market for my circumstances, not just one out of a selection of suppliers they have arrangements with!
This is the crux of my concern with commissions. These days, anyone with reasonable research skills can hop on a few comparison sites (and MSE ) and come up with a more-or-less "whole market" shortlist. This is a time consuming process, however, and the average consumer doesn't know the ins-and-outs of mortgage terms, etc, so there is valid scope for a knowledgeable IFA to handle this leg work, with the benefit of their expertise.
As a potential IFA-customer, I don't expect my advisor to only look at a limited range of options, potentially coming up with a worse pick than if I'd put the research in myself. If it is really too much for IFAs to keep up with the best deals/developments in their chosen area (e.g., mortgages), they can always use the same comparison tools available to consumers, but apply their knowledge of what is likely to be suitable to the client.
AFAIK, "whole of market" doesn't mean IFAs need to become experts in every avenue of financial advice (which I agree would be difficult) - I understand it to mean that if an IFA offers advice on a particular area (e.g., mortgages), then they pick the best from the whole market, not from their buddy list. This seems to me a very welcome enforcement.
For the record, I've never used an IFA to-date because I'm worried by exactly this sort of selective recommendation practice. As you quite rightly say, regardless of whether an IFA claims to be whole of market and without bias, an IFA with a good reputation is likely to be the key to getting good advice. Tracking down meaningful recomendations isn't always straightforward, however!
Psdie - My understanding is that in the context of the proposals (which really are being steam-rollered through) "Whole of Market" means that independent IFAs will have to provide advice on all aspects of the market.
IFAs are already required to operate on a whole of market basis for whichever area they are providing advice (this should allay your concerns). However, under the proposed rules, IFAs will be required to offer advice on all areas of financial planning. For example, an adviser who at the moment is, say, an investment specialist will be required to advise on other areas which at present are not ones for which advice is provided (e.g. pensions, or estate planning).
The new rules will stop specialists dead and as a result a many established and reputable businesses, who currently are providing valuable services, will have to make some difficult choices or cease trading.
An example of the seriousness of this issue is well illustrated by Hargreaves Landsowne who are considering not going down the independent route because under the proposed new rules it will mean that they will have to become involved in areas for which at present they do not offer advice, and do not wish to become involved with because it doesn't form a part of their business model (and this is despite the fact that they currently have about 60 IFAs within the business). If HL are pondering this one, and they are very big and one imagines have the resources at their disposal to cope, where will it leave the smaller IFAs?
There really is a genuine danger of restricted choice for the consumer and increased cost.
psdie, my understanding is the same as Soda21's - under the new rules, IFAs are supposed to become experts in all areas. At the moment, an IFA may restrict himself or herself to one or more parts of the financial services area and not offer any advice in others.
For example, one of the IFAs I use concentrates purely on pensions and does not offer advice in other areas. He researched all the pension options open to me and gave me a wide choice of relevant options for me to choose from. Once I'd chosen, he set up the scheme. The whole process took about four months and he did his job thoroughly. It would be impossible for him for him to do the same for mortgages as well.
If I needed a mortgage, I'd use a mortgage specialist IFA, who should know the ins and outs of the hundreds of mortgages available (and would have known about the thousands available a couple of years ago). Price comparison sites aren't anything as good as a good IFA. Some comparison sites effectively promote certain companies, none covers the entire market - some offers are not available on the web - and they don't explain all the terms and conditions. They are OK for little things, such as car insurance, but for anything complicated, you could well buy a duff product or get a bad deal.
The point about IFAs is that they are supposed to be properly independent. It seems to me (and I must stress again that I'm not an IFA but I do use them) that if the proposals go ahead, people like me will have no access to properly independent advice except at a huge cost. I couldn't have afforded the thousands it cost me to set up the pension in one hit up-front but I was happy to pay my IFA a few hundreds a year in commission over the next few years because he did a first rate job. I know exactly what I'm paying and exactly what I've got. For the life of me, I can't see what the problem is that the FSA is trying to solve.
We all know about commission bias but what about what I would call Fee Bias ?
When everyone is forced to work on a fee basis don't be surprised to see Advisers doing completely unnecessary work in order to pad the fees charged. Rather than selling a multi asset fund for 1.5% pa I can see my more sophisticated colleagues arranging a complex portfolio of EFT's for only 0.3% pa + platform fee of 0.6% pa + 1% Adviser fee + transaction fees of whatever the client wll accept . These funds will, of course, need rebalancing ever 3 months at say 0.25% per switch. Some HNW clients will be lucky to get away with fees of 3% pa.
Anyone who things that going fee based will solve anything is deluded in the extreme. Those who overcharge now on a commission basis will continue to do so when it comes to fees.
3) All IFAs, even the most experienced with long track records and spotless records, will now be required to pass extensive exams to stay in business. Why is the FSA not following the lead of other professions, such as accountancy, and allowing great experience as a qualification in lieu of exams? The IFAs believe requiring new entrants to financial advice being judged by exams is sensible.
Not to disagree with any other point, and perhaps going a little off-topic here, but this is incorrect. There is no legal requirement to have appropriate qualification to call themselves an accountant but that doesn't mean they are one. They can't actually sign off accounts nor audit without one - they can only provide the administrative functions of one. All of the professional accountancy bodies (ACCA, ICAEW, ICAS etc) require formal examination and formal experience to qualify, and CPD to maintain it.
It is, IMHO, absurd that anyone be allowed to give professional advice of any kind without proper qualification and being answerable to a supervisory body. That is what distinguishes professionals.
Psdie - My understanding is that in the context of the proposals (which really are being steam-rollered through) "Whole of Market" means that independent IFAs will have to provide advice on all aspects of the market.
If this is correct, I am in complete agreement with you and KK on this point - turning IFAs into jacks of all trades, masters of none is an really stupid idea!
I'm confused though that you suggest that *all* IFAs are already required to look at "whole of market" (e.g., all mortgage providers) when making recommendations. I read here on MSE (in the mortgage guide, I believe) that this isn't necessarily the case, and that one has to explicitly clarify this up-front when seeking advice?
If this *is* already the case, and there is effective enforcement of this (as opposed to IFAs nodding and smiling, and carrying on recommending certain suppliers!) .. then this should be better publicised, as I for one am put off approaching IFAs because of my (mistaken?) belief to the contrary.
How *is* this enforced though? If I'm given a recommendation by an IFA, then my friend points out that a far better deal is available from a highstreet bank, how do we know whether this indicates the IFA wasn't "whole market" after all, or that they were just incompetent in their research? Are there any assurances against either?
Interesting point from Bones1939 RE "fee bias" .. aka work stretching, as favoured by dodgy plumbers, etc. This seems to suggest that banning commission isn't necessarily the right way forward, but that instead we need to reduce the temptation for bias instead.
How about a standard agreed commission for each category of products, enforced by law or self-regulation? e.g., mortgage providers each pay the same standardised commission to IFAs that refer a successful applicant?
Either that, or introduce effective detection and punishment procedures for IFAs that display clear bias/incompetence in their referrals (i.e., regularly make referrals that aren't amongst the best options for the customer's cirumstances), either out of commission bias or due to evident lack of market research.
Thoughts? Clearly *something* is up with the industry - I doubt the FSA would consider sweeping action of this nature if biased IFAs were a very rare occurance.
Cheers, Ben (off on sunny holidays in the morning!)
I am a whole of market mortgage broker and not currently affected by the change in rules which at the moment just concerns investment advice. But it's clear from recent FSA presentations that they are looking to extend the commission ban to mortgages as well. This will simply put us all out of business, and leave the consumer to use the internet or a high street branch. Most people I meet are reluctant to use the internet because of product complexity and hidden charges etc, and if they visit a bank they will at best get very restrictive advice and high pressure sales.
At least in the investment market people have money to pay for advice, but when it comes to mortgages most of my customers are hard up families and often people with poor credit ratings, none of whom can afford to pay for advice.
In any case, the commission we receive is roughly the same today wherever we go and there is no incentive even for unscrupulous brokers to give bias advice.
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Pls be nice to all MoneySavers. There's no such thing as a stupid question, and even if you disagree courtesy helps. Take care over copyright. Use excerpts and links rather than copying long text. This site asserts copyright on all comments posted on the board.
Pls be nice to all MoneySavers. There's no such thing as a stupid question, and even if you disagree courtesy helps.
'Will killing commission kill financial advice?' blog discussion
- they are a commercial business after all, with bills and staff to pay.
Whole of market is vital for IFAs
) and come up with a more-or-less "whole market" shortlist. This is a time consuming process, however, and the average consumer doesn't know the ins-and-outs of mortgage terms, etc, so there is valid scope for a knowledgeable IFA to handle this leg work, with the benefit of their expertise.
Jack of all trades, alternative FSA action
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