FSA bans commission

whiteflag_3

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

why do have to wait until 2012, there are IFAs who have already working on the model outlined in RDR. I know you will find it hard to accept but some IFAs are forward thinking and have taken action already .

And why do you keep posting about people being charged 7% commission? Since 1994 we have had commission disclosure, so any investor will know what the advisor will be getting paid and therefore has the opportunity to walk away if they are not happy.

whiteflag_3

EdInvestor wrote: »

Why are IFAs so much more expensive than estate agents and solicitors?

It isn't apparent that they have higher skills, or that the work they do is more complex or time consuming, indeed in many cases it is quite the reverse.

Are they?

Please post the figures to back this view.

Lokolo

Are IFAs allowed to do tiers for X amounts?

So like:

Upto £5,000: £100 an hour
£5,000-£25,000: £200 an hour
£25,00-£100,000: £350 an hour

etc.?

whiteflag_3

Lokolo wrote: »

Are IFAs allowed to do tiers for X amounts?

So like:

Upto £5,000: £100 an hour
£5,000-£25,000: £200 an hour
£25,00-£100,000: £350 an hour

etc.?

Yes , but why would they ?

if you were investing £30K would you be happy paying twice as much as someone with £20K to invest.

Bear in mind as well as most IFAs dont just do standalone investments. Investments if at all are part of a wider planning exercise.

whiteflag_3

Aegis wrote: »

I actually think this is a very short-sighted view from the FSA. The option for hybrid fee paying will effectively disappear, making charges a matter of paying an hourly fee plus VAT to the adviser. Because of the VAT, the fee paid will effectively be 15% higher than it currently would be if the fee was paid from product commission and the rest rebated.

The article also highlights that this will be more expensive for the less wealthy clients. It certainly will. It will be completely ineffective to go to an IFA for small sums, as the work associated with doing a full factfind and assigning investments to that customer, plus occasional ongoing reviews (which will also now have to be paid for separately rather than through trail commission) will make the fee higher than the commission would have been. For example, someone investing £30k at 2% commission would have been charged £600 up front and would have had the option of ongoing service paid from the trail. Now it's possible that they'll pay easily over £1000 for 4 or 5 hours work plus VAT on top, effectively doubling the charge and making sure that they have to pay more charges if they ever want to take a look and rebalance their portfolios.

I think a better option would have been to force adoption of a 3-tier charging system: commission only, fee paying and hybrid fee paying.

I suspect that as a workaround many IFAs will end up charging an ongoing fee for whatever amount they actively service for a customer to assist their business when the harder times roll around (like the market crash we saw last year: without new business many IFAs would have been relying on their trail commission to stay afloat). This could always end up being more expensive again, but the FSA doesn't seem to mind that as long as it's "more transparent".

About the only good thing about this is that some of the large and very aggressive salesforces will probably have to become much more cost-effective to compete on a like-for-like basis.


EDIT: can we also assume that this means that all initial charges from funds will be paid in full by a customer going through an IFA on top of any charges they already have to pay for the advice?

agree with pretty much all you have said, except the VAT situation. If the advice leads to a product being taken out , VAT is not chargeable.

Retainers for ongoing service would attract VAT.

Also I personally think clients will wise up and not pay a fee based on the amount the IFA is servicing. The focus will move to the service the firm is providing.

GDB2222

whiteflag wrote: »

Yes , but why would they ?

if you were investing £30K would you be happy paying twice as much as someone with £20K to invest.

Bear in mind as well as most IFAs dont just do standalone investments. Investments if at all are part of a wider planning exercise.

Some increase in fees is reasonable for larger amounts, because of the greater cost if things go wrong. If 90% of your business would be covered by PI insurance of £100,000, but you need to carry £500,000 to cover the 10% of larger cases, it's reasonable that those cases should cover the extra PI cost through increased fees. Solicitors do this, so why not fee-based IFAs? However, the extra fees are nothing like doubling the hourly rate for an investment sum of £25,000.

EdInvestor

whiteflag wrote: »

Are they?

Please post the figures to back this view.

If an estate agent sells a house worth £150K he will typically charge 1.5% of the value, so £2250. The solicitor's fee might be what,around £4-600 for the conveyancing?

Yet if an IFA is investing £150k in an investment bond (up to 8% commission) or putting a £150k pension into income drawdown (at least 3% commission, perhaps as much as 5%), he will be earning between £4,500 and £12,000, for 4-6 hours work.

Now whatever you say about estate agents, it takes more than 4-6 hours work to sell a house, yet the agent earns half as much as the advisor. The solicitor may take about the same amount of time but earn only about 10 per cent as much, depite being required to obtain much higher qualifications.It is hard to see value for money in the advisory sector.

The fact is that there is no real competition in the advisory industry because the system is so opaque that the customer cannot compare prices and shop around between advisors.This thread is an example. Shopping around is only really possible in the execution only arena, and is IMHO one of the reasons why E/O is getting increasingly popular.

I am aware that some advisors are adopting the new RDR approach already.Perhaps you could advise how a normal investor could track down one of these advisors?

Lokolo

GDB2222 wrote: »

Some increase in fees is reasonable for larger amounts, because of the greater cost if things go wrong. If 90% of your business would be covered by PI insurance of £100,000, but you need to carry £500,000 to cover the 10% of larger cases, it's reasonable that those cases should cover the extra PI cost through increased fees. Solicitors do this, so why not fee-based IFAs? However, the extra fees are nothing like doubling the hourly rate for an investment sum of £25,000.

I was actually just thinking about the people who don't have a lot to invest.

If there is a base fee rate and everyone is charged the same then those who have, say £10,000, the % cost against the investment amount will be a lot higher than someone who is investing £100,000.

whiteflag_3

t

EdInvestor wrote: »

If an estate agent sells a house worth £150K he will typically charge 1.5% of the value, so £2250. The solicitor's fee might be what,around £4-600 for the conveyancing?

Yet if an IFA is investing £150k in an investment bond (up to 8% commission) or putting a £150k pension into income drawdown (at least 3% commission, perhaps as much as 5%), he will be earning between £4,500 and £12,000, for 4-6 hours work.

Do all IFAs take 8% commission? I thought it was banks/tied agents that take that sort of commission

Now whatever you say about estate agents, it takes more than 4-6 hours work to sell a house, yet the agent earns half as much as the advisor. The solicitor may take about the same amount of time but earn only about 10 per cent as much, depite being required to obtain much higher qualifications.It is hard to see value for money in the advisory sector.

but as one who doesnt use the advisory sector, you are hardly in a positition of strength to comment.

The fact is that there is no real competition in the advisory industry because the system is so opaque that the customer cannot compare prices and shop around between advisors.This thread is an example. Shopping around is only really possible in the execution only arena, and is IMHO one of the reasons why E/O is getting increasingly popular.

I agree but like ive said before, if an investor is not happy with the level of commission being taken by the advisor they always have the option of walking away.

I am aware that some advisors are adopting the new RDR approach already.Perhaps you could advise how a normal investor could track down one of these advisors?

most normal investors will be reading your posts telling them that they have to wait until 2013 for starters, so thats the first problem.

I do agree however that there is a real problem in getting the message out to the normal investor. Googling fee based advice doesnt lead to "fee base advisors" unfortunately.

Perhaps a list on this site would be useful.?

whiteflag_3

Lokolo wrote: »

I was actually just thinking about the people who don't have a lot to invest.

If there is a base fee rate and everyone is charged the same then those who have, say £10,000, the % cost against the investment amount will be a lot higher than someone who is investing £100,000.

thats right - thats why I cant stand this "our fee is x% of the amount invested" - a fee should be an hourly rate- dont you think thats the fairest way?