“One single factor has underpinned almost every mis-selling scandal over the last 25 years,” says Harvey Jones on Fool.co.uk. “It is the financial services industry’s very own c-word, commission.” Independent financial advisers (IFAs) have long taken their payment for selling products in the form of percentage-based fees charged both upfront and over the time period an investor holds a product.
So buy a unit trust and you’ll pay a few percent up front. Your IFA will share that with the fund management company and around 0.5% a year will go direct to your IFA. Or take term life assurance policies, says Martin Lewis on Moneysavingexpert.com. You might pay £30 a month for 25 years; meanwhile your IFA will pocket £600 upfront for getting you to do so. IFAs insist there is no such thing as ‘commission bias’ – that the amount of commission paid on any given product never influences their advice.
But with that kind of money on offer, it’s hard to believe it never happens: if your income depends on selling certain products, it must be pretty hard to tell clients they don’t need them.
So it has got to be good news for consumers that the commission system – against which we have been arguing for a decade – is about to come to an end. From 2012 commission-based investment sales are being banned by the Financial Services Authority (FSA). Investors will also have to be told very clearly if they are getting ‘restricted advice’ or not – i.e. if you adviser is only working with a limited pool of products (perhaps they work for a bank and only offers its products).
IFAs, fearful of the future, are warning that the changes mean financial advice will become more expensive and some people will no longer be able to afford their services. But it is hard to take this seriously. Paying fees doesn’t make anything more expensive, just more upfront. And financial advice has never been free. It’s just that in the past what you were paying was taken from your returns rather than being a clearly laid out upfront fee. Upfront fees won’t look cheap – good IFAs can charge £150-£200 an hour, just like lawyers. But overall the cost will be the same, or much lower.
And if you can’t afford a few hundred pounds it is very possible that your financial situation isn’t complicated enough to warrant having a financial adviser at all. You’d be better off just finding a good savings account. That said, the FSA have suggested that those who can’t afford the fees but are convinced they need advice should be able to pay fees in instalments.
Those looking for advice now should bear in mind that the changes don’t come in until 2012. Until then you will need to be aware that IFAs will be under even more pressure to bring in commission – nothing focuses the mind more than a deadline. That makes it particularly worth your while looking for an IFA who already charges upfront fees rather than commission. You can see list of some of these here.