Transparency is the issue rather than commission, says FP Advance, provider of transition planning services to UK adviser firms.
This reaction follows the Financial Services Authority’s announcement that its retail distribution review would look at the impact commission really has on the efficiency of the market, and the possible alternative structures.
Despite concerns within the industry, the regulator has recently criticised the current distribution model as failing to serve consumers and providers.
Brett Davidson, managing director of FP Advance, says: “Whether advisers charge commission or a fee is not the core issue as far as I am concerned. In many cases fee based advisers still collect payment via the product sale; however they have let the client know the price of their advice up front and this makes all the difference. The problem lies much more with transparency issues – clients must know what the advice will cost before they start the process.
”Imagine you went shopping at a supermarket, got to the checkout and said “How much?” only to be told “I’m not sure, but why don’t I write to you in the next couple of weeks and let you know” – I’m sure you would lose all confidence in them as a business. Yet this is how many advisers conduct their dealing with clients. Rather than presenting a clear outline of what they will do and how much it will cost, they skirt around the issue hoping to be paid adequately for their work when they sell a product. Whilst I agree the current model does not serve many consumers providers or advisers, banning commission is not the answer. This seems a pretty draconian measure in a free market society that would probably result in more limited access to advice.”
The FSA’s review of commission will look at five aspects: The economic impact of changing commission levels on business volumes, how distributors respond in reality to different commission levels, how often are product switches in a customer’s interest (for example a switch to a product with a lower annual charge), what alternatives to commission or more efficient ways of structuring commission exist, and whether any change will be to the benefit of consumers.
Davidson adds: “Product providers also have a role to play in all of this as they have convinced advisers and consumers that they are receiving a ‘free lunch’ by working on the commission model. Regardless of how it is dressed up, masked in the fee structure or subsidised by one client group for the other, ultimately the client always pays. The sooner the FSA, providers and advisers start telling this to the consumers, the sooner we can hope for some rational behaviour in the marketplace – regardless of a fee or commission model.”