How 'independent' is independent?

doogstoos

Hi,

2nd post on this forum and thankyou very much to the two respondees for their answers to my orig question.

I have another one if I may: just how independent are IFAs? Do they not get some kind of commision on each product they endorse? Does this not therefore 'weight' them towards products that pay more and thus ultimately the logic favours endorsing fatter commisions rather than looking after the customers financial interests?

Second: any good websits out there that give a list of accredited IFAs?

many thanks once again.

caveat_emptor

Not an expert, but independent means not tied to a particular company. From my own experience it does not necessarily mean you will get advice in your best interest as there are good and bad IFAs. Try unbiased.co.uk for list of IFAs for your requirement and area.

EdInvestor

"Commission bias" is a recognised problem in the industry.

Troubleatmill_2

The more I read the forum ( and others ) - the more I'm inclined to the following viewpoint.

1/ If you need an IFA then the New Model Adviser is probably the best type you can go for.

2/ IFA's cover a wide area - retirement, investments etc etc and not all are experts in all the areas - so maybe it's best to do your homework here and identify which area your IFA specialises in.

3/ IFA's charge a fee. For some strange reason - they want to feed and cloth their offspring. If you go it alone - you are alone, if you have an IFA make their recommendation - if you are mis-sold you can complain to the ombudsman and get compensation.

4/ With my ickle grey matter - it seems a very big and confusing area...


All I can suggest - is do as much homework as you can on this forum ( and others ) - and when selecting an IFA - be well informed as to what you want from them, how they are paid ( fees seems to be the much better deal! ).

The more I read on this forum - the more I am amazed that people seem to think that putting away £50 a month is going to give them £2000 per month income.

Anyways... good luck with your "journey"

Best
Troubleatmill

dunstonh

There have been many reviews into commission bias and not one has found evidence of widespread commission bias. Probably as most products nowadays pay the same amount and the differences are much smaller than once was. Plus more and more there is a focus on agreeing a commission as a fee in advance (i.e new model basis) to ensure there is no bias.

EdInvestor

Not your usual accurate self on this issue DH.

I refer you to the FSA boss's recent speech

The consumer does no better than the providers under the present remuneration model. This suffers from product bias, provider bias and "churn".

Product bias - in other words, the customer not being advised to take action consistent with their priority needs - is arguably the most detrimental. Consumers are not always advised on transactions which fail to remunerate the adviser, or which offer little by way of commission to the adviser. So, for instance there is a dearth of advice on paying off debt or the course of action to take with with profits policies, and national savings and investment trusts are neglected.

Provider bias is clear: I am struck by the prevalence of examples of providers managing demand – up or down – by adjusting commissions which can lead to less suitable or even unsuitable sales.

Linked to provider bias is "churn", with the potential for significant consumer detriment from paying unnecessary commissions, charges or fees when induced to switch from one product to another despite the benefits of such a move – if they exist – only materialising after a long period during which the switch has been to the consumer's detriment.

So the consumer does badly from the present business model too. Please note that I am not saying that commission as an incentive is necessarily bad – but at present it is clear that the way in which firms are managed when the commission model applies frequently fails to mitigate these high risks of inappropriate advisory and transactional activities taking place.

So basically the regulator says you cannot expect correct advice if the advisor makes no money from it, you may be advised to buy an unsuitable product which pays a high commission - or steered away from a suitable one which pays a low commission - and you may be advised to switch from an existing suitable product to an alternative which will be more expensive,simply because the advisor will make money if you do so.

dunstonh

This is the same FSA that has also said there is no widespread commission bias taking place and there have been a number of different research companies look into this at different times.

You have to look between the lines. No widespread... means most are not abusing it but some are.

There are inconsitencies in that quote Ed. For example, you arent allowed to go above 20% with any one provider. If you do, you can face an audit to check on the advice relating to those products and you can have your IFA/AFA status removed (if found to not be best advice). The mechanisms already exist to check for bias.

Also, an adviser telling someone to go into a Cash ISA or pay off a loan or save in national savings isnt documented anywhere. So, you are comparing one avenue which is highly monitored against another that has no monitoring at all. The stats on one side are easily checked and no stats are recorded on the other.

Personally, I think the only action required is the removal of full upfront commission on certain products (indemnity). If you take those investments on normal commission terms, then there is no potential for bias as the rates are the same.

There are also certain business models which require indemnity to survive. These are typically your large salesforce models where the adviser only gets a relatively small cut of commission earned. We have often said on here that it is best to avoid salesforces when getting advice (whether tied, multi tied or independent).

So perhaps the criticism should be levelled at the business models rather than the products.

tyllwyd

Well, I've just recently signed up with an IFA for pension advice so speaking as a consumer ...

I deliberately wanted to go for commission rather than fees, because cash is tight at the moment. I had three options, one of which was to stay pretty much as I was. He explained the options and as part of that explained what his commission would be. I took the gamble of going down the route with the highest fees. I've had the documents through and to be honest I was shocked at how little money he would actually be earning on my pension. So far I've spent about three hours talking to him so unless he can manage to get my pension fund growing at a decent rate, he is not going to be making a lot of money out of me.

Sharpie

Just one other point as well- IFAs have to give out a document called "A Guide to the Cost of Our Services" at the first meeting with a client which basically explains the company's commission levels compared with the FSA average guidelines . It also gives the standard hourly rates for admin support, and advisers qualified to standard and higher levels.

Ideally, the IFA should give the cost of a job in advance (either by fee or commission) and the client knows where they stand right from the beginning.

Some clients, endorsed by Tyllwyd above, prefer to pay by commission if appropriate, and there is nothing wrong with that it it means they have access to a good quality IFA and good quality advice as a result.

EdInvestor

Sharpie wrote:

Just one other point as well- IFAs have to give out a document called "A Guide to the Cost of Our Services" at the first meeting with a client which basically explains the company's commission levels compared with the FSA average guidelines . Some clients, endorsed by Tyllwyd above, prefer to pay by commission if appropriate

One does wonder if they all understand how much they're paying though: a recent FSA mystery shopping exercise found that many advisors were not showing the documents properly.

This report suggests the level of pension commissions being paid by some companies to get new business is massive.

Royal London, the UK's biggest mutual insurer, has reported a 21% rise in third-quarter new business but says rivals are still paying "unsustainable" commission levels to grab pension sales at any cost. Its subsidiary Scottish Life caps this fee at 7.5%.

But Axa, Scottish Widows and Prudential all have plans which could earn an adviser 15% to 20% of a client's fund, though anything over 9.5% has to be specifically authorised by the client.Standard Life, which caps its commissions at 5%, commented: "The customer gets a full disclosure notice, it is a question of whether he reads it or not, which you have natural worries about."

dunstonh

This report suggests the level of pension commissions being paid by some companies to get new business is massive.

Just goes to show that you cannot believe what you read in the press. That Scottish Life pension actually pays a maximum commission of 4.5%. However, on fee basis, they allow upto 7.5% and on that basis the annual management charge can drop to as low as 0.4%. On terms of 20 years or more that would make that contract cheaper than stakeholder.

As per usual, if you rely on press articles for your research, you will only get a one sided, negative and often incorrect picture.