Fees and Commissions

A letter to Money Marketing

Hi John,

I have been reading the ongoing debate about fees and commissions which has been re-ignited by Peter Hargreaves.

Getting hung up on whether one is better than the other rather clouds the more fundamental issue of offering fair value to the customer.

Offering fair value to the customer is not dependent upon how we are paid, but on the relationship between the amount we are paid and the amount of work we carry out for the customer.

A common and fair criticism of commissions is that many products offer maximum commissions that are disproportionate to the amount of work carried out by the adviser. Such products do not represent a fair deal for customers.

It is encouraging to note that there are a number of financial advisers that are taking on the FSA's treating customers fairly message and when recommending such products, endeavour to rebate commission to improve the deal for the customer. A good example of this is the arrangement of investment bonds on commission terms similar to unit trusts (i.e. 3% initial commission instead of 7.5%).

What is less encouraging is the seeming reluctance of product providers to integrate the treating customers fairly message into their product design process. Instead they are still offering high commission deals and the opportunity for certain firms to take commissions wildly disproportionate to the work they do for their customers.

I think the whole of market advice sector is becoming polarised in its own right, with IFAs serious about treating their customers fairly at one end, and the maximum commission / maximum turnover firms at the other end. (If such unsustainable business practices aiming at maximum turnover are driven by the management's interpretation of fiduciary duty, they need to step back and think through more carefully the meaning of fiduciary duty).

The concern I have is how these differences in the whole of market advice sector can be effectively communicated to the public, so when they need financial advice they are able to identify IFAs whose advice will be based on fair treatment, as opposed to a maximum commissions sales process.

Kind regards,

Robin Keyte

Providers TCF

A letter to Money Marketing:

Hi John,

I was interested to read David Barnett's letter in your 9 November 2006 edition on the FSA requirement for product providers to take more responsibility for the quality of advice.

I agree with him to the extent that the primary responsibility is on the adviser as it is the adviser that deals with the customer.

However there is a heavy secondary responsibility on the product provider to design a product that treats a customer fairly.

It could be argued that there are far too many products in existence whose design is strongly influenced by distribution and marketing costs (i.e. commissions and adviser support) and returns to product provider shareholders. In these cases the interests of the customer come a very poor third.

To illustrate this, it is easy to look at the opposite ends of the spectrum of investment product design.

There are presently a few UK index tracking unit trusts available with NIL initial charge and an annual charge including fund expenses of 0.5% per annum.

These charges make little or no provision for intermediary commissions and the product design could be described as very customer focused.

Compare the above to investment bonds which pay up to 7.5% initial commission and have an array of charges often including initial charge, annual charge, establishment charge, exit penalties etc.

These charges make substantial provision for intermediary commissions and the product design could be described as very intermediary focused.

Whilst I strongly believe advice must be paid for, there is a question over balance, how much should be paid, what represents value for money, the degree to which products should be laden with charges etc.

Kind regards,
Robin Keyte