The seemingly eternal debate of ‘fees versus commission' continues to rage, having been recently fuelled by the ABI's latest response to the FSA's retail distribution review.
As a strong advocate of Lifestyle financial planning myself, I believe that the concept of a client servicing culture, and the effective project management of clients from cradle to grave is not exclusive to the fees environment. Surely it can equally co-exist with a commission culture.
A few years ago I spent some time with Australian advisers in Sydney, who purport to be exclusively fee charging, but on scratching the surface, you soon discover that they are actually adopting a commission-offset model.
Their financial planning proposition is based on an upfront plan fee (which can be offset by indemnified commission) for collating the basis of the ongoing relationship and analysis of needs.
This is followed by a trail commission, ‘dialled in’ to the investment management part of the proposal. Many of their investment products are subject to ‘factory gate’ pricing, hence the concept of ‘dialling’ in a particular percentage or amount of trail commission to remunerate the adviser.
The Australians have one of the healthiest and most robust financial services cultures, and, significantly, they also have proof that the fee and commission models can and do co-exist.
So why it that commission is deemed evil and fees are good?
Over the years the regulators, and consumer lobby groups alike, have endeavoured to weaken the commissions’ model - spectacularly backfiring in 1995 with the introduction of hard disclosure that curiously resulted in a bumper year for business.
In my opinion, this demonstrated the consumers’ ambivalence to how an adviser is paid. If they perceive value, they are willing to pay for it, and even better if not out of their own pocket.
While fees do infer a higher degree of professionalism, mainly because of their perceived closeness to the accountant and solicitor models - and there is nothing wrong with advisers wishing to pursue this strategy - the other side of the equation is the VAT issue.
The commission model still enjoys vat-exempt status and in pure like-for-like terms, as with fees and commission offset, the 17.5% advantage for commissions is significant.
My final thought relates to term assurance products and the old maxim that ‘life assurance is sold, not bought’.The commission model is attractive in this regard, typically providing a high level of cover for a relatively low premium, and remunerating the adviser to an acceptable level.
Given this situation and the old maxim, the seemingly unwilling buyer is even less likely to buy it if he then has to make a payment for executing the transaction.
In conclusion, if it ain’t broke, then don’t fix it. Long may we all live with the option of choice and the certainty that if it works for the client and gets the right results, it cant be all that bad.
Colin Sloss is head of business development at The Exchange.
The opinions expressed are those of the individual and not those of the company he represents.IFAonline
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