The terms used to cover the payments an investor makes to an adviser are straightforward, aren't the...
The terms used to cover the payments an investor makes to an adviser are straightforward, aren't they?
Commission is a sum paid by a service (product) provider to an agent (adviser) in return for the performance of a particular service by the agent (adviser). And a fee is a sum paid by the recipient of a service to the provider of that service.
If only it were that simple. Take the following scenario. Adviser A sells an investment of £100,000 to a customer and agrees with that customer to take an annual fee of 1.5% plus VAT of the portfolio value every year. Adviser B sells the same investment to another customer and agrees to take an initial commission of 1.5% and an annual renewal of 1.5% of the portfolio value every year.
Adviser A calls his income a fee, payable by the customer direct, every year. Adviser B calls his income commission, payable by the customer indirectly through the product wrapper every year. The result is the same for the adviser and the customer but the customer's perception of value may well be different.
The customer can choose to seek and accept advice based on either a commission or a fee. Ultimately, the advice has to be paid for ' most customers understand this. Equally, most customers (other than the 10% or so who are sufficiently financially sophisticated, are used to paying professional fees and can afford to) do not want to pay a fee for advice but seem happy to accept that the adviser is paid through commission on what they buy.
The recent mis-selling scandals have given commission a bad name. Also, the original CP121 proposals inferred (wrongly, in view of subsequent changes) that fee-based advisers would give a better service. The fact is, commission-based advisers should not, and usually do not, offer lesser quality advice than fee-based advisers.
The market may well create a bias towards fees, driven by both negative customer perceptions of commission and Treasury-led initiatives, such as the cap on commission for pensions. Also, the Treasury has, of course, always had a vested interest in supporting fees, as these attract a VAT levy, whereas life companies have been able to claim a tax allowance for commission payable under life contracts.
As commission payments reduce and the burden of cashflows moves from the service provider to the agent, fees may become more prevalent. So, a commission on a term policy may be earned on day one but not paid for four years, whereas the same policy could pay an equivalent customer fee to the adviser on day one.
So where do we go from here? Compliance, as always, is the key. What really matters is a robust advice process that always acts in customers' best interests and delivers an understanding of their needs together with the delivery of appropriate financial solutions. The customer should always have the choice of paying for this through commission or fees, and this should always be agreed up front before the advice process begins. The FSA-recommended menu approach, in response to CP121, will also support this position.
Despite what most commentators would have us believe, commission is not always bad and fees are not always good. However, choice is always good.
Martin Finch is communications manager at Misys IFA services
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