'Will killing commission kill financial advice?' blog discussion

isla05

A big thanks to KennyKoala - I really hope you put this forward to the FSA!!

isla05

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!

psdie

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.

KennyKoala wrote: »

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 :cool2:) 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!

Cheers, Ben

Soda21

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.

KennyKoala

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.

Bones1939

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.

dave2

KennyKoala wrote: »

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

Soda21 wrote: »

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!) :j

rogersnodin

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.

koexelek

rogersnodin wrote: »

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.

The powers that be do not want the man in the street to get independent financial advice. They would rather they had to play " russian roulette" dealing directly with the providers, with no come back or advice given.

If the average person in the street has the choice of paying a broker a few hundred quid to find them the best product, or getting it " free " ( even though it might be totally unsuitable for their needs) from a provider, they will take the second option every time.

I always select the best product for my clients, with no commission bias whatsoever.
I know that if they decide to take a " second opinion" or confirm/check what i have told them for themselves, on the internet, I will lose all credibility ( and their continued custom) if I am not proved to be right.

I fully expect to have to give up my independent status in 2012, and either work directly for a lender/insurance company direct sales force, or quit the industry for good.