In response to the above I submit the following comments: -
Q1. The clear literature and explanations we give to our clients regarding the
structure of commissions and why they are related to the products and advice
given have never caused any confusion. To abolish indemnity commission would be
severely detrimental to the industry as it is this which pays for the work that
the FSA insist we complete to create a clear and just paper trail to justify the
advice given. If we simply converted to fees this would be very difficult to
convince a prospective client that they must pay for work which is required to
get to the point of giving advice, which would in turn have the effect of
deterring a prospective client from taking advice before we have had the time to
perform the necessary research and presentations, to then convince them of a
need that they were previously unaware of.
Q2. No. If fees are the answer to providing advice, why then is PI cover related to investment premiums? The amount of commission received is directly proportionate to the liability carried by the adviser. If we simply charged a level fee for advice, will the ABI and FSA insist PI insurers adopt the same stance when assessing risk?
Q3. Partly. That advice differs between advisers is human nature. Depending on the risk of the client it may not be the best advice to pay off debt when surplus savings exist. This is discussed however clients' responses vary and must be taken into account. The new menu of fees is woefully inadequate and extremely confusing. It will now add to the time it takes for an initial meeting and in some cases confuse a prospective client into thinking that cheap is best. We have seen this is not the case with Stakeholder contracts and also the bancassurers. To explain to a prospective client the commission structures and differences of all of the contracts available before actually finding out what, if anything they actually require, will definitely confuse. It would be better if the commission structure was discussed on the particular contract after the decision to recommend it is made, very much as is the case now. To compare IFAs with bancassurers on cost alone is a great miss-representation since the two do not perform the same tasks. By bringing in another tier of adviser I feel that the general public will not understand where they can turn to for best advice and this will now have an even more detrimental effect on long term savings.
Q4. We offer a mixture of fee paying advice for matters such as IHT planning (where products are not necessarily required) and debt counselling. I understand this is fairly common in the industry and is therefore largely the reason why your figures show that a large proportion of advisers have been paid at least some fees in the past. This does not mean that all clients will be willing (or able) to pay fees as this is a market that requires the products to be 'sold' and not bought. The report ignores the fact that if we acted in the same manner as accountants and solicitors whereby we simply waited for clients to come to us with their enquiries, we would be bankrupt within 3 months. Our industry cannot be compared to these other professionals as until we can review a prospective client's circumstances it is usually not possible to ascertain exactly, if anything that can be done for them. If financial advice was legally required annually, such as tax returns, or on death, such as probate, then we would be better suited to charging fees. Unfortunately it remains the case that we must seek out prospective clients, however if we ask to see them and then inform them it will cost a fee without knowing in advance how we can help them, it is unlikely we would receive any new clients. Commission works if explained correctly and in the current format it works. This of course is with the exception of stakeholder products which we do not arrange as they do not cover the cost of meeting the client in the first place.
Q5. To abolish indemnity commission is unacceptable. This is the life blood of most small IFA firms like ourselves and whilst we are trying to move more to fees (with the great reluctance of many clients - including the very wealthy) and fund based commissions for annual servicing of clients needs, this will take several years to build up to a reasonable level and in my opinion will never cover the costs we incur. Our businesses have become very expensive to run due to over legislation and have less real value due to the constant worry of claims. The need for indemnity commissions will remain and whilst these do not represent all of our business, they will none the less be required for us to continue to trade.
To have commission structures the same for related products is not a clear explanation. If by this it is meant Investment Bonds pay the same as ISAs, this is a definite NO. The former are more complex contracts generally used for more in depth income and IHT planning. With the Government now plundering ISA funds for tax they no longer hold any benefits other than CGT. With careful planning CGT should never be paid anyway so these contracts are now all but redundant. The term 'related product's does not in my opinion give justice to the financial services market. Whilst a term assurance is a life assurance contract it does not make it 'related' to Whole of Life, they are generally used for entirely different reasons; pensions do not all come under the banner of Stakeholders and not all investments are the same. It is therefore very dangerous to assume that since they have similar titles, then they must be the same.
Annual reviews are important for some clients and offered to all. The fund based or renewal commissions do help towards these costs, however rarely fund them entirely. Renewal commissions in fact only just cover the cost of writing to a client with a brief summary of what the insurer/investment company are sending them. Letters to clients from these institutions are so complex that it is now necessary to send an explanation along with them. If we receive just 50p a month renewal from an endowment policy or pension, this doesn't cover the time required to review the client file, dictate the letter, type it and then post it. Clients in the main do not understand what work is undertaken on a daily basis on their behalf and should not therefore be in control of what we get paid when they are not aware of the onerous tasks placed upon us on a daily basis. Also ignored is the constant need to keep updated with technology, without renewals and fund based commissions, who would pay for these costs? Certainly not the clients.
Annual commission statements would be a good idea, however in the case where the renewals/fund based commission are very small this could prove more expensive to send and therefore push up the provider's costs and in turn make the contracts more expensive for the investor. The option to obtain this information online could be offered to the investor if they so wish to go and seek it. Too much paperwork is sent out already, this again would just increase costs and cause more confusion.
The right to change adviser should be available and if this means the commission would definitely move to the new adviser this would help keep all IFAs on their toes. This however would need to apply to ALL providers for both new and existing contracts. If not then what incentive exists to review older contracts that continue to pay the previous adviser?
If there is a reduced choice of commissions this will restrict the IFA from
being able to decide how to fund his business. Commissions are discussed with
the client and implemented in such a way by the adviser based upon what work
he/she feels the client will generate on an ongoing basis. If this choice was
restricted does this mean all clients must then be treated in the same way,
regardless of their needs, based simply on the income we are able to obtain?
Our industry and profession as IFAs is now so strictly regulated that any advice/transaction performed on behalf of a client is documented in triplicate, combined with this has been the need to upgrade computer systems and pay for electronic filing and databases. This has caused a severe increase to our workload and costs, with a reduction in remuneration. Too much emphasis is placed on 'consumer' choice in terms of dictating how we are paid. This is not a consumer industry. We give advice to the clients that we seek out and find, not as is the popular misconception to the members of the public that knock on our doors daily! If we are forced to charge in the same way as accountants and solicitors we will not survive. Being given the option to charge fees should be the right of an IFA, not mandatory; this is the choice of the client. The relationship between PI cover and premiums must be removed if fees are to work and even then the option for commission must still exist.
Commissions are fair as they remunerate for work actually undertaken and to a
certain degree permit cross subsidisation so that we can provide some of our
advice to those who need it without needing to send them a bill.
If the fees demanded by the FSA, FSCS and PI companies reduced dramatically then
perhaps we could afford to have our incomes reduced accordingly and then get
paid solely by fees, however this is extremely unlikely. Fees only work and will
continue to only work with a minority of the populace, giving them the choice is
acceptable, but dictating to the whole is not.
"A lie told often enough becomes truth."
Allow these chattering classes to get away with this stuff and next thing you know it become accepted. I have no doubt the ABI would love to distribute their products without distribution costs. Remove distribution costs and hey presto no distribution!
Lord Jenkin of Roding: My Lords, does the noble Lord recognise that one of the measures to which the Government have attached great importance is the stakeholder pension? Do the
Government further recognise that almost universally those who have tried to sell stakeholder pensions have discovered that the cost limit allowed by the scheme simply does not enable them to remain solvent? Will the Government urgently look at the matter?
So where are all these fee paying stakeholder clients and their fee charging advisers?
The Association of British Insurers (yes the very same) said that 82pc of schemes sponsored by employers, who are required to offer them, remain "empty boxes" with no members.
Only 13pc have chosen to make contributions on behalf of employees. The ABI said only 1.5m individual stakeholder pensions had been sold since launch in April 2001.
Most of these are existing transfers or taken out by parents and grandparents for children.
to your consultation document
Page 18 invites a response:
Q:4 None required
Most adviser know the difference between a demand product and a non demand products - the latter requires selling! If a product is a "non demand" product it needs to be sold and if it needs to be sold a client will often not pay a fee because he will be unaware of the benefits (until the point of sale). If commissions are higher than fees it is because those that buy subsidise those that don't. I would suggest this is many times better than the farcical idea that the blue collar worker is going to pay £150.00 an hour to sit down with an IFA!
Comparisons are all too often made with solicitors and accountants and there are many in this industry that seek to emulate these bodies. I would point out that these so called professionals are hardly held is high esteem by the majority of my clients and I understand the Law Society has a huge backlog of complaints that makes the speed of the pension review look admirable.
However, these bodies (not well liked by the consumers) charge after the event i.e. after the marriage break up or tax year-end. How would we remunerate a solicitor for pre divorce planning? Would we pay a fee to cover the break up of a marriage yet to occur? But these bodies have seen the light!!! If you have ever been involved in litigation and your lawyer works on a no win no fee (commission) basis you will know that the clients love it! What's more they don't mind one bit when the lawyer locks into the client damages because they know the lawyer is committed to success and not charging for failure. Commission is no win no fee and you need to be very careful before you throw the distribution baby out with the dirty bathwater.
The Good IFA is a rare example of forward thinking, forward planning - working ahead of the game on events yet to occur and in some cases anticipating events never to occur. Lawyers & Accountant charge for tangible services on event that have occured and IFA deal in intangible services that are not well suited to fees.
Of course we are quite happy to charge where the service can be quantified but how then do you charge for an intangible event that may or may not occur and in many cases is years away. You have a recent and clear example of what happens when this nonsense is allowed to become conventional wisdom - STAKEHOLDER!
Stakeholder shows that when you remove distribution costs you remove distribution and yet we still hear the same claptrap about the evils of commission.
Spend some more time on:
1. Advanced Corporation Tax takes MORE out of a pension in charges than does the commission and contract charges.
2. The removal of the 10 per cent tax credit on dividends that are paid within an ISA.
Commission is a bit like fuel tax ...easier to blame the Arabs than Gordon!
The FT is in the post. Thanks for referring me to the various comments on the ABI consultation document. Having read the first 100 pages of the CRA report as soon as it was published, I had decided to
respond in detail, but have not yet found the time. Some important issues arise:
1 Indemnity Commission - I have not personally used this for over 10 years, but recognise that it is necessary to have some funding to get a business off the ground or to expand an existing business. I don't
think that we can realistically argue that IFAs deserve indemnity commission because they have to find new clients - that implies a cross-subsidy between clients, which is one of the factors that the regulators are trying to eliminate. New firms of accountants and solicitors also have to find clients. Perhaps better to argue that IFAs cannot afford to go out trying to pursue the government objectives of increasing savings unless they receive payment for the time they put into clients at the time they put in that time. I have often wondered how my solicitor would have reacted if I had offered to pay his conveyancing fees over 20 years, being the anticipated time I would live in my house. If indemnity is not available, some very similar alternative will be required so the argument that it should be abolished is pretty specious.
2. Trail/renewal Commission - frankly this is needed to pay all the small recurring costs of a practice for administering clients' affairs. These would include: changes of address, valuations, ongoing advice on policies & investments, ongoing research, chasing errant direct debits, helping with detail for tax returns, finding money that insurance companies have lost, correcting provider errors etc etc. If I had to send
out a bill every time I engaged in one of the above activities it would be absurd. The alternative would be for the client to pay me a monthly retainer fee, but I am not sure that this would be fairer as there would still be cross-subsidy.
May I suggest that we all scratch our heads and think of all the areas that fall within the 'ongoing administration and advice' heading. The more there are, the more persuasive the case for continuing with renewal and trail commissions.
May I also suggest that we go on the offensive a little. Much of the time of my practice is taken up with resolving problems caused or exacerbated by insurance and investment companies. If they got their houses in order and a) provided accurate documentation first time, b) provided accurate answers to questions first time, c) responded to letters within 3 working days, and d) combined all their legacy systems so that there was one platform from which we could extract data, then the expenses of running our practices would drop and maybe we could manage on a lower income stream.
3. Product bias - this one makes me smile. Who is it that creates the product bias by paying 7.25% commission on investment bonds? Could it possibly be the same insurance companies who are members of the ABI?
4. Hidden agenda - (not very well hidden!). The CRA report indicates that the new regime must work with insurance companies' legacy systems. Why would this be necessary unless the ABI are
contemplating back-removing all renewal and trail commissions, the payment of which is a contractual liability. That would save them some money! Would they pay it all back to clients?
Hopefully this is some food for thought.
reminds me of the heady days back in the late 80's & ROLAC and LAUTRO agreement on commissions when everybody agreed not to pay "high commission" how long was it before the life offices broke ranks because they didn't get any business.
it makes me laugh - nothing new in this industry just brush off something old that didn't work the first time !!!
I whole heartedly agree with the comments of Mr X
One other concern is the mention yet again of VAT. It seems to me that every
time I read about commissions verses fees VAT rears it's ugly head.
Do you think that it is a case of "the more we hear it mentioned the more
comfortable we would feel if it was introduced"? I can already hear the
Weary Willies of our industry saying " I knew it would only be a matter of
time before it was introduced".( you know the type)
I am no expert on how the government administrates VAT but my best guess is
that it must be a lot easier to charge it on fees than on commissions.
Maybe I am being a bit paranoid with the way the inners of Mr Brown's head
works, but then again he thinks that the best way to encourage the general
public to save for its retirement is by increasing tax ( e.g.. ISA and
Pensions etc.). The thought of all that commission being paid out without
VAT surely cannot sit well with him.
He is paid very well for the sale (spin ) of these ideas, but I am not sure
if he is paid commission or fees or salary.(please advise)
A survey from the British Chambers of Commerce suggests the cumulative cost of regulations introduced since 1998 is £38.9 billion.
Perhaps the ABI should focus less on commission/distribution costs and more on regulatory costs? How about including a regulatory reduction in yield figure and
How Much Does Your Regulator Charge ?