Sins of commission facing a clampdown

Sins of commission facing a clampdown

Paying thousands of pounds upfront for advice when you buy a financial product could become a thing of the past under new proposals from the Association of British Insurers.

The ABI spells out in a new report its plans for major changes in the way financial advisers are paid when they sell savings products. The report recognises the long-standing concerns surrounding commission, including the structure of charges and whether advisers are inclined to recommend plans paying the most commission.

Consumers have also been concerned that commission levels are generally too high. You might expect to pay commission of up to 3 per cent of your Isa investment, around 6.5 per cent on a with-profits bond and as much as a third of the first year's contributions to a pension, independent financial adviser Informed Choice suggests.

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The government's attempts to curtail commission levels have stumbled. In 2001 it launched stakeholder pensions, which boasted charges capped at 1 per cent. Financial advisers felt there was no room within this margin to cover the cost of the advice involved and, according to the TUC among others, sales of the low-cost pensions have been correspondingly low. Last June the stakeholder charge cap was raised to 1.5 per cent.

The ABI's report also attempts to address the apparent lack of consistency on how much work advisers do to earn ongoing commission, known as trail, or renewal, commission, which can be paid as long as you keep up your premiums.

Teresa Fritz, principal researcher at consumer watchdog Which?, says: 'Paying an adviser for ongoing advice is a good idea, but some advisers take renewal commission without even seeing their clients.'

The ABI is trying to help consumers negotiate the commission dilemma by suggesting that its members simplify commission structures. It proposes an end to indemnity commission, where the adviser is paid a large slug of cash upfront, and wants advisers to provide a continuing service, including annual commission statements.

The trade body also proposes that customers be free to move trail commission payments between advisers if they feel they are not receiving good value.

Independent financial adviser representatives appear somewhat perplexed by the ABI's proposals because, as the report acknowledges, there does not appear to be commission bias.

David Severn, director general of the association of IFAs, says: 'The ABI's research shows if consumers choose commission it does not lead to significant bias, either to sell a financial product, or to sell the wrong one.'

Some IFAs, however, welcome elements of the proposals. Nick Bamford, managing director of Informed Choice, says: 'It is an adviser's duty to tell customers what they do for the commission earned. Consumers are entitled to know what they're paying for and if advisers can't prove value for money, then the consumer should feel free to renegotiate the arrangements or go elsewhere.'

Which? believes some of the proposals are good, but would like to see the principles apply to all products.

The ABI's consultation on its proposals is due to close on 31 May and the findings will not be published until next year.

Which? recommends fee-based advice, arguing this shows the adviser has thought carefully about the true value of his or her services, as opposed to being led by the commercial decisions of product providers.

Consumers can decipher whether fees, easily up to £100 an hour, or commission best suit their needs by testing the market for advice in both. Many advisers are willing to give the first half-hour consultation at no charge. You can use this to establish how you can pay them and what you get for the money, including how the adviser plans to earn renewal commission.

Whether you opt for fees or commission, advice is never free. Typically, any commission that product providers pay advisers will be reflected in the less generous terms of your investment.

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