FSA bans commission

Rollinghome

Aegis wrote: »

If the initial charges then stay at 4-5% on average, the total cost of financial advice could easily shoot up to over 7% once the investments have been made.

I don't really understand why would that happen?

Why would any IFA recommend over-priced UT funds if he is no longer getting any kickbacks from the fund managers to do so? If the IFA is enabled to recommend ITs and ETFs, which don't pay commission, and UT's will no longer be allowed to pay commission, then there will be true and fair competition for the first time. They will all be on a level playing field and the IFA enabled to give unbiassed advice without losing out on commission.

We'll see far more use of cost-efficient fund management and the IFA can concentrate on giving good advice rather than raking in enough commission.

Most importantly we'll get greater transparency. The idea that financial advice could ever be had for free is a deception. It always has to be paid for somehow just as do those "free" surveys for windows and kitchens. Now the investor will know exactly what the cost is without it being hidden in fund charges. The costs will be paid by the client for good advice not by the fund managers (using the client's own money) for feeding them business.

I see it as a good for all decent honest IFAs too who already give unbiassed advice who won't have to compete with the less scrupuloust ones out only to maximise their commission. IFAs won't be paid creatures of the fund managers any longer and have the chance to be seen as true professionals answerable only to their clients. The biggest losers might be those rubbish investment bonds paying 7-9% commission and the biggest gainers the poor saps who buy them.

I haven't seen the details yet but do have some reservations. If bank reps are allowed to be paid sales bonuses then they shouldn't be allowed to be called "advisers". Bonuses are no different to commission. The distinction should be clear. If bonuses are necessary they should be paid for customer satisfaction levels and not for sales.

We'll need to see the effect on those with small sums. The idea that if IFAs are currently able to give advice for £100 paid from commission that they'll suddenly be unable to provide it for that price when charging fees only instead doesn't convince me. The difference being there will less suspicion or reason for bias. The client will fully understand what he's paying and expect to get what he's paid for.

What I'd hope will happen would be what happened to stock brokers. Not many years ago brokers were for gentlemen. They charged 2% for ropey service and you had to pay £1000 plus for your own trading software and price-feed. Now we have cheap brokers who offer superb service and facilties fo £10 a trade. OK, so hey, you don't get the coffee, smarmy broker, and panelled office but I can manage without.

No one would want to see the good cornershop IFAs overwhelmed by the big boys though some do deserve to go. (Including the nice but dim character I saw a few months ago. Full details available to anyone who wants them.) They will have to be as efficient.

The biggest shakeup could be at the lower end of the market. For the best advisers, it could be a great opportunity to provide a super-efficient low cost service providing, honest, unbiased advice for the masses making maximum use of computerisation. Change is badly needed and well overdue. Change always provides opportunities for the most efficient. I'd hope enlightened IFAs would embrace the changes and position themselves well in advance rather than being dragged kicking and screaming in 2012. They'll be the winners.

SnowMan

EdInvestor wrote: »

A good move, pity we have to wait until the end of 2012 for it.


http://www.ft.com/cms/s/2/d2c98efc-626d-11de-b1c9-00144feabdc0.html

Excellent news. :j:j:j:j:j:j:j:j

It's a bit like parliament. The people who would make the best MPs don't become MPs.

And similarly the people who would make the best IFAs wouldn't want to become IFAs because of the current commission biased system.

Doesn't mean that there are not good MPs out there (who haven't abused the expense system) or good IFAs (working on fees only basis) but the current system works against such individuals.

Time to party in 2012.

Geoffo_M

If you agree an upfront fee with an IFA, what is there to stop him claiming the commission as well? Probably an obvious answer, but something I've always wondered

Aegis

Rollinghome wrote: »

I don't really understand why would that happen?

It's based on the assumption that unit trusts and oeics continue to have the same charging structure, i.e. an initial charge plus annual charge. If this happens and commissions are banned, then the charges will be payable on top of advice.

Sure, if the structure changes and unit trusts and oeics drop the initial charges and some of the trail costs, then that will even things out a bit.

Why would any IFA recommend over-priced UT funds if he is no longer getting any kickbacks from the fund managers to do so? If the IFA is enabled to recommend ITs and ETFs, which don't pay commission, and UT's will no longer be allowed to pay commission, then there will be true and fair competition for the first time. They will all be on a level playing field and the IFA enabled to give unbiassed advice without losing out on commission.

Unit trusts can be more appropriate than ETFs or Investment Trusts depending on the risk profile of the client. With more products on offer we can hope that things will get more competitive, but there's no guarantee that the most appropriate products will end up being the cheapest by a long stretch.

We'll see far more use of cost-efficient fund management and the IFA can concentrate on giving good advice rather than raking in enough commission.

I sincerely hope that's the result, but I worry that we'll see higher charges for smaller investment amounts for the reasons I've mentioned above. An IFA might well not be affordable on a fee-only structure, and I still have my concerns about the costs of some of the better products out there if commission is simply removed without a corresponding decrease in charges.

Most importantly we'll get greater transparency. The idea that financial advice could ever be had for free is a deception. It always has to be paid for somehow just as do those "free" surveys for windows and kitchens. Now the investor will know exactly what the cost is without it being hidden in fund charges. The costs will be paid by the client for good advice not by the fund managers (using the client's own money) for feeding them business.

I honestly don't think that the charges were hidden with commission in most of the simple products. Unit trusts and OEICs are fine in terms of charges: you have an initial charge and a trail charge, and you as a customer are told how much commission is paid and how much is then kept by the IFA. I agree that products like investment bonds with ridiculously high charges were less transparent because of the layered charges, and I think those needed to be addressed. However, I really don't see anything wrong with commission when it's rebated above a certain percentage anyway...

I see it as a good for all decent honest IFAs too who already give unbiassed advice who won't have to compete with the less scrupuloust ones out only to maximise their commission. IFAs won't be paid creatures of the fund managers any longer and have the chance to be seen as true professionals answerable only to their clients. The biggest losers might be those rubbish investment bonds paying 7-9% commission and the biggest gainers the poor saps who buy them.

If that's the prevailing view of the consumer, then I can see this as a good think. However, as IFAs are required already to offer a fee-paying service for those who don't like commission, I really don't know why it should be outright banned.

I haven't seen the details yet but do have some reservations. If bank reps are allowed to be paid sales bonuses then they shouldn't be allowed to be called "advisers". Bonuses are no different to commission. The distinction should be clear. If bonuses are necessary they should be paid for customer satisfaction levels and not for sales.

I liked the original idea that bank advisers would have to be called financial salesmen. Bonuses aren't a problem to me because they actually give a reward for doing a lot more work than someone else in the same role. I quite like performance-related pay in general.

We'll need to see the effect on those with small sums. The idea that if IFAs are currently able to give advice for £100 paid from commission that they'll suddenly be unable to provide it for that price when charging fees only instead doesn't convince me. The difference being there will less suspicion or reason for bias. The client will fully understand what he's paying and expect to get what he's paid for.

From what I've gathered there's fairly little suspicion now, hence the very low number of complaints about IFAs to the FOS. There are a few, but as mentioned they could already choose the fee-paying option.

What I'd hope will happen would be what happened to stock brokers. Not many years ago brokers were for gentlemen. They charged 2% for ropey service and you had to pay £1000 plus for your own trading software and price-feed. Now we have cheap brokers who offer superb service and facilties fo £10 a trade. OK, so hey, you don't get the coffee, smarmy broker, and panelled office but I can manage without.

Personally I hope that the career survives well, as that's where I hope to be eventually

No one would want to see the good cornershop IFAs overwhelmed by the big boys though some do deserve to go. (Including the nice but dim character I saw a few months ago. Full details available to anyone who wants them.) They will have to be as efficient.

Details are always fun!

The biggest shakeup could be at the lower end of the market. For the best advisers, it could be a great opportunity to provide a super-efficient low cost service providing, honest, unbiased advice for the masses making maximum use of computerisation. Change is badly needed and well overdue. Change always provides opportunities for the most efficient. I'd hope enlightened IFAs would embrace the changes and position themselves well in advance rather than being dragged kicking and screaming in 2012. They'll be the winners.

I'm curious to see how it all pans out. If the charges for unit trusts and oeics are reduced in response to this, then I'm all for it. But I'm interested to see how they force IFAs to structure the fee option. If they make it a flat fee for everything regardless, then I'd be wary of that. If they allow businesses to decide their own fee models with possibility for percentage charging, ongoing servicing charging, etc, then I can support it wholeheartedly.

For the most part I think it's an overreaction and something that could have been done in a different way with less upheaval.

Still, if the charges all move into line, then it's still be fine.

Aegis

Geoffo_M wrote: »

If you agree an upfront fee with an IFA, what is there to stop him claiming the commission as well? Probably an obvious answer, but something I've always wondered

The commission is rebated to you. If you see that it's not being rebated, you would be able to make a legitimate complaint or court case against that IFA for breach of contract if the situation wasn't corrected to your satisfaction.

dunstonh

If you agree an upfront fee with an IFA, what is there to stop him claiming the commission as well? Probably an obvious answer, but something I've always wondered

As Aegis says, rebated is one option. The others are the lowering of product charges or paid back into the plan or used to offset the fee with any difference being made up in the fee or rebated depending on the amount. Some contracts dont allow a rebate and must be used to lower charges (HMRC for example wont allow rebates on pensions).

EdInvestor

http://www.timesonline.co.uk/tol/money/investment/article6590383.ece

A timely warning in the run up to 2012 - watch out for advisors selling high commission products with high trail now, so as to cushion themselves against the coming changes.

dunstonh

EdInvestor wrote: »

http://www.timesonline.co.uk/tol/money/investment/article6590383.ece

A timely warning in the run up to 2012 - watch out for advisors selling high commission products with high trail now, so as to cushion themselves against the coming changes.

Look at the errors in the article though. Most IFAs cannot recommend ITs/ETFs. Tied agents certainly cannot. So, no wonder they are not covered. IFAs account for most NS&I index linked cert applications. Tied agents are not authorised to recommend them. No mention of any of those facts. Of course, those facts dont suit the tone of the article.

kippen_noedel

EdInvestor wrote: »

A good move, pity we have to wait until the end of 2012 for it.

I'm not totally sure this is the right move. People should have the choice, pay commission or select to pay an upfront fee.

withnell

They should bring something in something where they pay the commission based on the performance of the investment over the long term - and if it doesn't perform as described, the customer gets some of the commision themselves!