FSA bans commission

Pennywise

For starters, I'm NOT an IFA so no vested interest. As an accountant, though, I have a couple of "one man band" IFA clients, who I also work with on behalf of my clients.

They are already offering fee-based, hourly rate, advice as an option for all their clients, but very few clients are wanting to do it that way.

The problem they highlight is that they do a lot of work for lower earners where the commission they get works out at very low hourly rates since the clients don't have hundreds of thousands to invest, or where part of their advice involves products on which there is no commission at all, which they do as part of the overall package. In effect, the richer clients are subsidising the poorer ones.

They say that the richer clients will end up with a cheaper service, but the poorer clients (probably those unable to do their own research) will be left in the cold as they won't be able to afford the hourly rates.

I know for a fact that one of my IFA clients (who is a damn good IFA and has worked as such for the last 25 years) will probably close down and do something else. He is already looking at other opportunities. If we aren't careful, we're going to lose the good independents and get left with the banks etc employing spotty teenagers on low wages.

It is going to end up like accountants and solicitors, where only those who can afford the fees get the advice, and those who can't afford them are left to fend for themselves.

I really can forsee that the number of IFAs will dramatically fall as more and more people are priced out of their services. I can't see how this can be in everyone's best interests.

Considering the amount of change and increased regulation that IFA's have had to endure over the last decade or two, it is a very poor reflection on the FSA that things still aren't right. Perhaps the problem is that the FSA aren't properly policing the existing rules rather than that the rules are flawed?

kennyboy66_2

Pennywise wrote: »

For starters, I'm NOT an IFA so no vested interest. As an accountant, though, I have a couple of "one man band" IFA clients, who I also work with on behalf of my clients.

They are already offering fee-based, hourly rate, advice as an option for all their clients, but very few clients are wanting to do it that way.

The problem they highlight is that they do a lot of work for lower earners where the commission they get works out at very low hourly rates since the clients don't have hundreds of thousands to invest, or where part of their advice involves products on which there is no commission at all, which they do as part of the overall package. In effect, the richer clients are subsidising the poorer ones.

They say that the richer clients will end up with a cheaper service, but the poorer clients (probably those unable to do their own research) will be left in the cold as they won't be able to afford the hourly rates.

I know for a fact that one of my IFA clients (who is a damn good IFA and has worked as such for the last 25 years) will probably close down and do something else. He is already looking at other opportunities. If we aren't careful, we're going to lose the good independents and get left with the banks etc employing spotty teenagers on low wages.

It is going to end up like accountants and solicitors, where only those who can afford the fees get the advice, and those who can't afford them are left to fend for themselves.

I really can forsee that the number of IFAs will dramatically fall as more and more people are priced out of their services. I can't see how this can be in everyone's best interests.

Considering the amount of change and increased regulation that IFA's have had to endure over the last decade or two, it is a very poor reflection on the FSA that things still aren't right. Perhaps the problem is that the FSA aren't properly policing the existing rules rather than that the rules are flawed?

This change is guaranteed to have unintended consequences, however commission only products have had a direct causal link to every mis-selling scandal from personal pensions onwards.

IFA's will have to come up with a model where senior, experienced staff service the wealthier clients and junior staff service less complex clients.

GDB2222

I really can forsee that the number of IFAs will dramatically fall as more and more people are priced out of their services. I can't see how this can be in everyone's best interests.

I think it will help many people, actually. Products will become much cheaper. It's not just the cost of the commissions. There's a whole broker-adviser network that can be down-sized. Things like duplicating all letters to the IFA as well as the client, even for small investments. I reckon it will improve returns for the average punter by around 1% pa assuming all the cost savings get passed on. Against that, the punter will have to rely on generic advice websites, rather than having an IFA give him individualised advice, which quite frankly can be of very variable quality.

whiteflag_3

Pennywise wrote: »

The problem they highlight is that they do a lot of work for lower earners where the commission they get works out at very low hourly rates since the clients don't have hundreds of thousands to invest, or where part of their advice involves products on which there is no commission at all, which they do as part of the overall package. In effect, the richer clients are subsidising the poorer ones.

While I agree with your view on numbers of IFAs etc , I find it interesting that you think a system where the rich cross subsidise the less wealthy is equitable and one where an industry can survive long term.

Given that IFAs are supposedly financially astute and you being an accountant, I would have thought that dealing with profitable clients would be the main aim of their business and not providing a charitable service to those who cant really afford it?

Rollinghome

whiteflag wrote: »

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?

Yes I do, and I can't see how any other arrangement can be without the risk of bias.

A system based on the commission offered by the product providers is clearly open to bias. So is a system based on a percentage of the sum invested (so that the more a client is persuaded to invest, the more the adviser earns). Perhaps the reason why the Which? investigation found so many advisers encouraging their investigators posing as clients to invest rather than pay down debt. A commission system serves the product providers well by getting their products sold but provides less good value to the client.

The current problem is finding an IFA genuinely offering fee-based advice. I recently used unbiased.co.uk to find an IFA qualified to give investment advice for a very large sum. Their website advertised that they offered both commission based and fee-based advice.

When I met the adviser he made it very clear he wasn't interested in working other than on commission. On a commission basis, quite apart from the initial commission, they would have benefitted from an on-going four-figure trail commision from the product providers every year. He was a nice enough man and a director of the company but just from the initial interview it was clear his knowledge was very limited and not worth having at any price.

Firms like his will need to change or be the first to suffer when the new regulations come in. When clients come to actually write a cheque for advice services, rather than having the fees buried in commission payments, they'll expect to get what they've pay for.

The IFAs able to give good advice will prosper while those who may be great at selling but less capable to advise will hit the buffers.

whiteflag_3

Rollinghome wrote: »

Firms like his will need to change or be the first to suffer when the new regulations come in. When clients come to actually write a cheque for advice services, rather than having the fees buried in commission payments, they'll expect to get what they've pay for.

Spot on. Once investors start getting statements with "your adviser has been paid £XXX" each year they will start asking exactly what are you doing for it. IF the firm hasnt got a decent service proposition they will struggle.

dunstonh

Products will become much cheaper.

Not likely to be that much in it. The only difference is that the retailer will set the charges that cover their remuneration instead of the product provider.

If you are hoping for a big drop in charges then its unlikely to happen. There will be some decreases in some areas but there will also be increases in others.

Rollinghome

Pennywise wrote: »

I know for a fact that one of my IFA clients (who is a damn good IFA and has worked as such for the last 25 years) will probably close down and do something else. He is already looking at other opportunities.

Why? If he really was giving good advice last year he would have been telling his clients not to invest but to move into cash. But if he was dependent on commission from the product providers giving that good advice would have cost him dearly in lost commission. Under a fee-only system he would be paid exactly the same even when the best advice is to move from investment to savings.

Unfortunately the present commission system can most reward the unscrupulous who give bad advice and penalise IFAs who give totally unbiased good advice.

Rollinghome

dunstonh wrote: »

Not likely to be that much in it. The only difference is that the retailer will set the charges that cover their remuneration instead of the product provider.

If you are hoping for a big drop in charges then its unlikely to happen. There will be some decreases in some areas but there will also be increases in others.

Presumably when IFAs are allowed under the new arrangements to sell ETFs and investment trusts but won't receive commission from the unit trust fund managers that will increase competition on the UTs. There'll also be no hiding place for UT funds charging TERs of 2% that don't outperform trackers at less than 0.5%. The IFAs will be free to seek out the best and most efficient investments for their clients without any regard to commission being paid.

GDB2222

dunstonh wrote: »

Not likely to be that much in it. The only difference is that the retailer will set the charges that cover their remuneration instead of the product provider.

If you are hoping for a big drop in charges then its unlikely to happen. There will be some decreases in some areas but there will also be increases in others.

I can see why you are an IFA. You make these generalised statements without any justification. Please explain why there will be increases in charges in some areas? Which areas, and why?