'Will killing commission kill financial advice?' blog discussion

Soda21

Frankly, the future for IFAs is not a good one.

Even if the number of IFAs and IFA firms is only reduced (and already in recent years it has been reduced significantly), then the prospect for choice available to the wider public will be severely restricted. Those seeking independent advice (not something wrapped up as such by a bank or building society) - when they manage to find it - are likely to find that it will be a lot more expensive than it is at present.

In the meantime, banks, etc. will continue to rake in high commission based upon volume sales, etc.

But, hang on, wasn't commission supposed to be a really bad thing and so must be banned?

Walter_J

When are we going to stop using this ridiculous term 'advisor' in relation to financial services? IFAs are salesmen, pure and simple.

There's nothing wrong with being a salesman. I sell kitchens for a living; I listen to my clients, establish their needs, and suggest what I think is the best solution.

This doesn't make me a 'kitchen advisor'! I only earn money if I sell something; therefore I'm going to do my damndest to get a sale. Please someone tell me what is the difference between my job and that of an IFA.

The only difference I can think of is that I am honest enough to describe myself as a salesman!

The only true 'advisors' are those that charge fees. Anyone dependent on sales commission who purports to be an independent advisor is a liar.

rogersnodin

I suggest you stick to selling kitchens and keep your nose out of financial matters, as obviously you don't know what you're talking about. To sell financial products you need to have appropriate qualifications and meet strict advice and selling standards, to make sure that what you offer is best for the customer.

Walter_J

rogersnodin wrote: »

I suggest you stick to selling kitchens and keep your nose out of financial matters, as obviously you don't know what you're talking about. To sell financial products you need to have appropriate qualifications and meet strict advice and selling standards, to make sure that what you offer is best for the customer.

It doesn't explain why you can't be honest and describe yourself as a salesman. If you are wholly dependent for your income on the commission earned on the products you sell then you are a salesman, not an advisor.

Incidentally, I worked for several years in 'financial services'. My job was described as a 'life & pensions advisor', although what I was was a life insurance salesman. My point is that there is nothing to be ashamed of in being a life insurance salesman; so why dress it up in disingenuous terminology?

If IFA's really believe themselves to to be on a level professionally with lawyers and accountants, then they should have the courage of their convictions and start charging £150 an hour for their services and pass any commission earned back to the client. Only then could they possibly claim to be truly 'independent'. Then let the market sort things out. The good ones would prosper, while most would fail and be forced to take proper jobs - as salesmen!

You might also like to know that the knowledge, skills and training needed to be a successful kitchen salesman at the higher end of the market are far greater than those demonstrated by most 'Independent Financial Advisors'.

The pay and prospects are better too!

rogersnodin

If IFA's really believe themselves to to be on a level professionally with lawyers and accountants, then they should have the courage of their convictions and start charging £150 an hour for their services and pass any commission earned back to the client. Only then could they possibly claim to be truly 'independent'. Then let the market sort things out. The good ones would prosper, while most would fail and be forced to take proper jobs - as salesmen!

The whole point of this discussion Walter is that advisers are now going to have to charge their customers for advice, and most of them can't afford to pay, which leaves them at the mercy of greedy high street bankers where they can still get free "advice".

koexelek

rogersnodin wrote: »

If IFA's really believe themselves to to be on a level professionally with lawyers and accountants

Having an IFA is not essential.
You don't have to have a proper accountant, but it will probably cost you money in the long run if you don't.
You have to have a lawyer though.

Therefore, IFA's will never hold the same status in the eyes of the public.

sandsy

KennyKoala wrote: »

Martin

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.

Absolute rubbish

KennyKoala wrote: »

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?

They won't - they'll have to have adviser charges, the same as IFAs. And furthermore, they'll have to come up their charges as if the distribution arm was a standalone business, with no cross subsididation.

KennyKoala wrote: »

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?

The OFT put an end to capped commissions for everyone saying they were anti-competitive. I'm guessing this is the same reason that factoring won't be allowed under the new regime (based on my knowldge form those in the know )

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.

Chartered accountants and lawyers have to pass exams - experience doesn't wash without the exams. Which professions are you thinking of?

KennyKoala wrote: »

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.

That's why IFAs will still be allowed to use panels. They'll just need to show how they chose their panel and how they revciew it on a regular basis.

KennyKoala wrote: »

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.

The banks will be subject to the same charging requirements (and qualification requirements) as IFAs. It could be argued that if a person can't afford a few hundred pounds for advice, they shouldn't be investing in a product anyway. Regular premium investments will still be able to have advice costs deducted over time.

KennyKoala wrote: »

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?

Because research shows that a huge proprtion of people don't actually know what they're paying for - many of those who've been subject to commission thought that advice was free. Plus commission can bias product advice, eg. investment bonds vs single premium CIS vs ETFs

KennyKoala wrote: »

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?

That's becauase people don't read the 8th/10th page of the Key Features Document where product providers have hidden the amount of commission that has been paid to the adviser.

KennyKoala wrote: »

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.

The direct sales forces will also need to be qualified to QCA Level 4 and to implement adviser charging. So the opportunities for mis-selling will be pretty much the same as for any other financial adviser.

KennyKoala wrote: »

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.

This is taking the FOS statistics out of context. The figiures for banks etc include things like PPI and bank charges which skew the figures.

KennyKoala wrote: »

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.

The cost will be less than 1% of the financial services industry's profits each year.

KennyKoala wrote: »

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?

Maybe because if you sell an investment contract with a poor outcome for the consumer, the aftermath for that consumer can be significantly longer than 15yrs?

KennyKoala wrote: »

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.

KK

The changes will create a much more level playing field between the IFAs and the banks which any half-decent IFA ought to be able to use to their advantage, especially given the title of "restricted advice" for non-independents. Consumers will no longer be duped into buying investments before they've paid off essential debts or put aside rainy day money. The quality of the advice will be higher and when they receive advice, they'll know in advance exactly how much it's going to cost them and what services the cost covers

Soda21

rogersnodin wrote: »

If IFA's really believe themselves to to be on a level professionally with lawyers and accountants, then they should have the courage of their convictions and start charging £150 an hour for their services and pass any commission earned back to the client. Only then could they possibly claim to be truly 'independent'. Then let the market sort things out. The good ones would prosper, while most would fail and be forced to take proper jobs - as salesmen!

The whole point of this discussion Walter is that advisers are now going to have to charge their customers for advice, and most of them can't afford to pay, which leaves them at the mercy of greedy high street bankers where they can still get free "advice".

Already there are many IFAs who charge fees for their services, so let's not to overlook them.

Also, do not forget those who offer to offset their fees with commission.

There are a variety of options out there, and at the moment those receiving advice have the opportunity to decide which method of remuneration is most appropriate to their circumstances.

Unfortunately, if fees become the only option then the choice available to the consumer will become much more limited by virtue of the fact that it really is likely that on the grounds of cost many will be put off seeking out the services of an independent adviser.

koexelek

Soda21 wrote: »

Unfortunately, if fees become the only option then the choice available to the consumer will become much more limited by virtue of the fact that it really is likely that on the grounds of cost many will be put off seeking out the services of an independent adviser.

Which is of course, what the banks want

Walter_J

Soda21 wrote: »

on the grounds of cost many will be put off seeking out the services of an independent adviser.

Logically then, independent advisors will have to reduce their fees down to the market level which people will be prepared to pay.

Supply and demand.

I suspect that independent financial advice will increasingly be dispensed over the internet via subscription sites in order to keep costs to a minimum. This is the kind of business model I would be looking at if I was an IVA. There is no real need ever actually to meet your client...