Wealth Watch: IFAs' 'free' advice tied to commission is on the way out

Published on Saturday 6 December 2008 13:37

THE world of financial advisers is about to undergo a major shake-up following the findings of a review launched by City watchdogs two years ago to address the poor service that consumers received from the financial advice industry.

The Retail Distribution Review has concluded that the commission-based model is bust and more advisers should move towards charging clients fees for their services. Professional standards also need to be raised.

When the review got under way, the then chairman of the Financial Services Authority, Sir Callum McCarthy, was damning in his assessment of the service that investors were having to rely on.

He said: "We have at present a business model which is based on incentives which produce results which are unattractive to reputable providers, unattractive to their customers and whose benefits to intermediaries are questionable."

The FSA has now published proposals for steps designed to improve the consumer experience, to raise professional standards and remove conflicts of interest in the financial advice industry.

While some of the proposals will take up to four years to be implemented fully, the financial advice industry is now on a path from commission-based product sales made in the interests of the adviser to truly independent fee-based financial advice in the clients' interests.

The problem that consumers face today is that the advice of many independent financial advisers is compromised. The majority of advisers earn their income from commissions paid by product providers for selling financial products such as investments and pensions. The risk for the consumer is that their IFA has a financial incentive to advise them to buy the highest commission-paying product.

The FSA has recognised that 'independent' advice is potentially tainted whilst this conflict of interest remains. It is therefore introducing more stringent measures related to advisers being able to give unbiased advice, agree fees with clients and be better qualified.

The FSA also wants to improve qualification levels in the industry, and particularly with regard to the industry benchmark. The current benchmark, the Certificate in Financial Planning, is too low. It is sarcastically compared to a GCSE in woodwork by some in the industry.

The FSA has recommended a new 'Level 4' qualification for financial advisers, equivalent to the first year of a degree course.

However, Level 4 qualifications should still only be a stepping stone to all advisers achieving Chartered Financial Planner status; this is the industry's highest qualification level. Setting Chartered status as the industry benchmark will help to put the financial advice industry on a more level playing field with professions such as law, accountancy and medicine.

Unfortunately, the industry is starting from a low base, as a staggering 79% of advisers have not yet achieved the Level 4 benchmark. The evidence is also that the majority of these are not currently taking steps to improve their qualifications.

Towry Law has campaigned for the abolition of all commission payments to financial advisers. We believe that commissions cause a conflict of interest that can lead to consumers getting the wrong advice.

Whilst the FSA has not explicitly banned commission, they have taken measures to ensure that the days of commission-based advice will soon be coming to an end. It has proposed that any payments from a product provider to an adviser are agreed with the client and deducted from the amount invested.

This proposal will explode the myth that commission-based advice is free. Advisers will be forced to show consumers how much their advice will cost.

So if an adviser wants to sell a 100,000 investment bond to their client and they want to take 'commission' of 7%, they are going to have to agree with the client how much they are paid. They will also need to explain that this amount will come directly from the investment, leaving just 93,000 in the bond.

How many clients are going to opt to pay 7,000 for an hour or two of advice to buy an investment bond?

• Andrew Fisher is chief executive of Towry Law