In the CP121 document on polarisation, the FSA raises the thorny issue of commission versus fees. ...
In the CP121 document on polarisation, the FSA raises the thorny issue of commission versus fees.
Those in favour of fees being the uniform standard method of payment across the industry often cite the legal and accountancy professions as examples of good practice.
However, they neglect to mention that while fee payment is common when it comes to probate or commercial matters, the vast majority of litigation departments within law firms have established the concept of no win, no fee and we see a parallel here.
The question of for whom the adviser is acting is not compromised by such an approach.
It is important that the alternative fee choices ' such as pre-agreed rates of commission for particular product types, irrespective of provider, or pre-agreed defined payments ' are clearly explained to investors before advice is given.
However, that being the case, there is no reason to insist on defined payments.
Effectively, the investor can be offered a choice between payment of a defined monetary amount or a debit against the value of their recommended investment plan.
We believe there is strong resistance by the general public to payment of defined monetary commercial fees (comparable to those charged by other professionals).
The effect of a defined payment system as envisaged will be to restrict independent financial advice to only the very wealthy.
The option of paying for advice at pre-agreed commission rates seems to offer a far more palatable alternative and significantly extends the reach of independent advice.
That said, it would be imperative that the cost of advice is clearly and separately identifiable.
To a large extent this would be achieved by the adviser disclosing in advance the rate of commission (and equivalent monetary amounts) that would be received in the event of a particular product or products being recommended.
This being the case, the provider should still specify the actual amount which is payable by way of commission (a) to confirm that it is in line with the adviser's initial disclosure and (b) to relate that disclosure to the specific case of the product finally selected.
In the case of other (non-independent) advisers, I see no real need to separate the costs of advice as the adviser is remunerated by the provider and advice is simply one of the many costs of delivering the product to the consumer.
In fact, to separate the cost of advice may be to suggest that it is controlled completely by the adviser and undermine the independence distinction.
Finally, in order to avoid potential product bias in such a system, it may be necessary for the FSA to specify broad categories of product for which commission rates should be equal, without specifying the rate that should apply, which should be left to commercial pressures.
We also understand that the VAT treatment of fees received by way of commission is more favourable than direct monetary payments.
Jonathan Polin is managing director, UK and Europe sales, at Aberdeen Asset Management
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