IFAs are focusing on too broad a sector of the market and as a result there is too much reliance on commission from continually selling products rather than on a holistic long term planning service, argues Abbey.
The firm warns while the debate over commission versus fees is just one of the pressures which could change the IFA market, the business model will have to operate on fees in the future, with those at the lower end of the market switching to high street banks and tied agents for advice.
Abbey does, however, say that this won't happen overnight and "will be painful".
Comments made by Callum McCarthy, chairman of the Financial Services Authority (FSA) last September - about the problems of the current business model used by advisers and in which he described the market as “failing consumers, providers and even intermediaries” - are on the right track according to Stefano Del Federico, UK sales director at Abbey Wealth Management.
He says the company is continually working to educate advisers about the benefits of adopting a long-term planning approach rather than just selling a product for commission and walking away.
He says this kind of approach has generated a disconnected feeling with consumers, particularly as many still do not understand exactly what the products are and whether they are suitable for their needs.
Del Federico argues one of the problems is some IFAs are looking at clients to see how many products they can sell them to gain the commission, and as a result when a customer receives a call from their adviser they know the IFA is ultimately looking for a signature on a direct debit form or cheque.
It points out this immediately makes the customers suspicious and hostile which generates the feelings of mistrust and which is giving IFAs a reputation “almost as bad as estate agents”.
As a result, Del Federico says there is a growing gap in the market between those who consider themselves as financial planners and those who operate under the IFA tag, providing the example of seminars where many CFPs refuse to attend if IFAs are in the same audience.
Abbey says it is trying to educate IFAs who know they probably should move to a fee-based model, by showing them how to do it and putting them in touch with other advisers who have made the transition.
That said, Del Federico believes it is not being made easier by some life companies who tell advisers they should probably switch models but then offer higher rates of commission.
"It’s like a dealer pushing cocaine and rehab at the same time, telling advisers they should really quit but then offering them one last fix,” says Del Federico.
His comments also follow research from Aegon on advisers’ views on the FSA’s retail distribution review currently taking place, which suggest some in the industry believe may lead to another attempt to ban commission based payments.
Figures from the ‘IFA Insights’ survey reveals 88% of advisers would be dissatisfied with a total ban on commission as a means of remuneration, while 95% believe commission has a vital role to play because clients are unwilling to pay a fee for advice.
Brett Davidson, managing director of IFA business consultancy FP Advance, says it is refreshing, but not surprising to see these results from IFAs.
He adds: “We work extensively across the IFA market and are finding that the vast majority of IFAs are looking for ways to move to a recurring income model. The major sticking point is ‘how’ to achieve this move with pressures on up-front cash flows.”
Alasdair Buchanan, head of group communications at Scottish Life, also adds out the commission model is simply unsustainable going forward and says more and more evidence is starting to come out in support of this.
He adds: “Any adviser operating on this model needs to be aware it won’t be around for too much longer, and they should be looking around for models which stand the test of time and not rely on some providers doing stupid things.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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