By GRAHAM FROST 04/05/2007
The Association of British Insurers (ABI) caused quite a stir this week by suggesting a switch from commissions to fees.
In its response to the Financial Services Authority’s (FSA) Retail Distribution Review, the ABI urged the FSA to encourage advisers to move away from provider-led commissions to ‘Customer Agreed Remuneration for Intermediary Services’ which, in plain English, means fees. The ABI also proposes that customers should agree what, if any, post-sale service the adviser will provide and be entitled to cease the service if unhappy and have the bulk of charges reinvested on their behalf.
| "...the irony is that ABI members are generally amongst the worst perpetrators when it comes to paying fat initial commissions..." |
While this all sounds perfectly sensible, the irony is that ABI members are generally amongst the worst perpetrators when it comes to paying fat initial commissions in a bid to sell products through advisers. Almost all instances of financial advice mis-selling over the last 20 years, including pension transfers, endowments and with-profits bonds, have involved high commission products peddled by life companies.
Even now, life companies continue to pay sky high initial commissions to encourage sales of questionable products such as endowments and investment bonds. For example, while unit trust providers typically pay 3% initial (normally refunded via Bestinvest) and 0.5% annual commission, life companies usually pay up to 7% or more initial commission on investment bonds. Incidentally, investment trusts rarely pay any commission at all. If you were a commission-based adviser under pressure to hit a sales target, which would you sell?
All of this leads to a solution that Bestinvest has supported for some time – the unbundling of commissions from products. By removing adviser remuneration from product pricing (so-called ‘factory gate’ pricing), all financial products should be able to compete on a level playing field and advisers would have no financial incentive to bias one product over another. Yes, this would probably herald the beginning of the end for weaker products, providers and advisers, but consumers would benefit as a result.
| "This ‘unbundled’ approach would then dovetail perfectly with fund supermarkets and platforms." |
This ‘unbundled’ approach would then dovetail perfectly with fund supermarkets and platforms. Unit and investment trusts could co-exist with similar charging and investors would simply pay explicit additional fees (if any) for specific tax wrappers such as ISAs and pensions. Investors wanting advice would agree a fee with an adviser, independently of the platform, with a clear understanding of the service to be offered. If they are subsequently unhappy with the adviser’s service they can cease paying fees and then re-negotiate with another adviser. The investments meanwhile would remain unaffected, with the charges unaffected by the choice of adviser. Of course, this falls down if the adviser is also the platform provider, but these are currently in the minority.
Life companies appear to have seen the writing on the wall. A number have launched wrap platforms and/or taken steps to improve their investment fund performance in anticipation of their traditional commission driven business drying up. Whether their efforts will be sufficient remains to be seen.
For once, I sincerely hope that the FSA listens to the ABI!