One interesting side effect of the CGT row is the fact that is has brought the commission system used by the Independent Financial Adviser industry to a wider audience.
I bumped into an equity trader friend in the street last week. He was in shock. He’d never had any reason to think about the cost of financial advice to the average punter before but in a briefing from equity analysts that morning on the effect of the CGT changes on the insurance industry he had been staggered to learn that the average initial commission paid to an IFA for selling an insurance bond to a client is 7-8%. No wonder they were so upset about the changes wiping out their business (by making ordinary equity funds look relatively more attractive from a tax point of view), he said in awe, “these guys charge more than hedge funds.” He was doubly admiring when it occurred to him that, unlike even the dodgiest of hedge fund managers, the sellers of these bonds didn’t even have to make any money for their clients to get their cut – you give them £50,000 to invest and they get £3,500 in commission upfront and immediately. “Brilliant,” he muttered as we separated.
We think of things from slightly different perspectives he and I. I’m more inclined to think that the commission system is an outrage. 7-8% is an unusually high commission (which suggests the insurance companies were making unusually good profits out of the products) but most financial products bought by most ordinary people are also paid for via commission rather than by a straightforward and transparent fee system.
IFAs say that it is not how people pay for advice that counts; it is how good the advice is when they get it. The problem with this is that how you pay for advice tends to have an impact on how good it is when it comes. The fact is that when people in any industry are paid by commission they will favour selling (perhaps consciously, perhaps unconsciously – who knows) the products that pay them the highest commissions. Most IFAs will tell you this isn’t true but if that were the case why would product providers compete to offer the highest commissions? And why would articles in trade magazines aimed at IFAs outline the commission arrangements for products before they even explain what the products are?
I constantly get press releases about how advisers can earn 4%, 5% or even 6% upfront for persuading clients into particular funds or products. Product providers aren’t stupid. They’ve been incentivising IFAs like this for years — if it didn’t work they wouldn’t do it (which is why so many people now find themselves with insurance bonds of course).
With this in mind I’m really pleased to have received a copy of a letter from John Lang, a director of financial advice firm Tower Hill Associates to the Financial Services Authority (FSA). It calls for the formal creation of a category of advisers who charge for their time on a fee only basis and who rebate any sales commissions they might get from fund management and insurance companies direct to their clients. I can’t understand why such a category doesn’t exist already. I know there is huge demand out there for it for the very simple reason that I get endless amounts of letters from commission burnt investors asking me to recommend fee only advisers to them. We pay all our respectable professionals (lawyers doctors and the like) hourly fees. Why not IFAs too? Lets hope the FSA is in a listening mood.
First published in The Evening Standard
For a list of fee based IFAs in your area, click here: Fee only IFAs
Any comments on this article? Please email editor@moneyweek.com