It’s been a good week for consumers. Under new proposals from the Financial Services Authority (FSA), independent financial advisers (IFAs) will no longer be able to accept commissions from product providers after December 2012. Instead, IFAs will agree upfront fees for their advice. The FSA is aiming to put paid to ‘commission bias’.
The trouble with the current approach is that – despite protests to the contrary – consumers are often sold products that pay advisers the highest fees, rather than those that are most suitable. For example, investment bonds offered by life companies pay up to 8% commission, “and what do you know, these bonds get offered left, right and centre”, says Alice Ross of FT Money.
The Association of Independent Financial Advisers reckons IFA firms will have to fork out an initial £210m for the changes (or roughly £6,000 per adviser). Life insurer Aviva estimates that up to half of all IFAs will have to leave the business. But as Pam Atherton puts it on Defaqto.com, “compared to the cost to the industry of settling previous mis-selling scandals, such as that for personal pensions at £11.8bn and mortgage endowments at £2.7bn”, the cost of the changeover looks a “bargain”.
So the plans, along with a proposal that IFAs should be better qualified, are welcome. But that doesn’t mean that all advice will be independent. Advisers in bank branches, for example, will still be able to sell only their own products. Under the FSA proposals, they will have to make this clear, and will be described as ‘restricted’ advisers. The measures are still under consultation. But with confidence in the financial services industry at rock bottom, it’s unlikely there will be much resistance, especially as similar measures are being forced through in the US and Australia.
A knock-on effect is that these genuinely independent advisers will have to become familiar with a wider range of products. That could put pressure on the fund management industry to cut its fees, as IFAs – no longer tempted by commission payments – choose cheaper products for clients, such as investment trusts, exchange-traded funds, or even National Savings & Investment products, suggests Ross. The only pity is that we have to wait until 2012 for the changes to come into force. In the meantime, you can find a list of fee-only IFAs here.