It’s never pleasant to hear of job losses. But the news last week from Threesixtyservices.co.uk that 3,500 independent financial advisory (IFA) firms – around 30% of the industry – could close due to the economic downturn may not have many people reaching for the Kleenex. After all, the term ‘independent’ suggests that IFAs offer impartial financial advice. The trouble is, that doesn’t mean they do. Many will happily sell you the fund or pension that earns them the best commission from a product provider – otherwise, why would providers pay commission at all?
But all that could finally be about to change. The FSA is proposing a number of far-reaching changes to the way IFAs operate that are designed to eliminate ‘commission bias’. First, by 2012, they want IFAs to agree with clients how much their advice will cost before they recommend a product. The idea is that consumers will then be able to distinguish between the cost of the advice and the price of the product they’re buying. Currently, the two sets of charges are often bundled into product commission, so many consumers wrongly assume they are getting the advice thrown in for ‘free’.
Secondly, the regulator is proposing that IFAs make a clear distinction between fee and commission-based services. Those who receive a commission for selling products from just one issuer, or a select group, will in future be called ‘sales advisers’. Those who are strictly fee based on the other hand – typically charging clients by the hour and able to recommend any product – will retain the title ‘independent financial adviser’. This has irked quite a few commission-based IFAs, who are worried, no doubt, about the cost of switching to becoming fee based. They claim, rather weakly, that putting the word ‘adviser’ after ‘sales’ will confuse clients. The changes “could not have come at a more problematical time”, says Gavin Shreeve of the IFS School of Finance in Financial World magazine, with IFAs busy battling the downturn.
But plenty of others disagree. Andrew Fisher, chief executive of IFA Towry Law, tells The Daily Telegraph that the FSA report is “brilliant news for consumers. If you want to sell clients a £100,000 investment bond with 7% commission, you will have to tell them upfront that you are taking £7,000. How many people will opt for products with high commission once it is put so starkly?”
The FSA also wants all IFAs to take “advanced qualifications” before offering full advice to customers. Only around 20% have one now, according to Fisher. Trevor Matthews, president of the Chartered Insurance Institute, hopes the proposals will bring in “higher levels of competence and professionalism”. As such, we’ll raise a glass to the FSA.