Fees V's Commission

Fees V's Commission and 'Independence'

Aifa believes commission charging advisers can remain IFA



Aifa believes comments from David Severn today about defined payment mean commission charging advisers will still be able to call themselves independent.

The trade body believes the regulator will now look for more transparency about the way advisers are charging their clients.

Aifa has welcomed today's announcement by the FSA's David Severn that the proposed defined payment system and the authorised financial adviser category look set to be scrapped.

Aifa says it is not surprised that DPS looks likely to be replaced with a much more workable solution more in line with the menu based approach it has been working on with IFA Promotion and has put to the FSA.

Aifa director of public affairs Tracey Mullins says: "With the menu the cost of advice will have to be given to consumers early in the process and separated from the product. It would allow IFAs to operate on commission or fee basis, not linked to their status. It is better for IFAs and would allow many more to remain independent."

Following on from this move Aifa believes it makes sense for AFA to be scrapped saying it as never clear what it meant in the first place and how it would be distinguished from IFA.

Mullins says: "Just having IFAs and multi-tie would make it much clearer for consumers. But this all depends on what the FSA proposes for the tied sector. We would hope it will consider an equivalent disclosure regime for multi-ties as for IFAs."

MoneyMarketing

The Real world

The blind spot non-practitioners have is that they do not meet and deal with a cross section of consumers, young and old, informed and uniformed, each and every day about their financial affairs. Instead views are formed academically with a stereotypical person in mind, usually somebody like the critic, and when consumers are interacted with, its usually those who have been wounded by advice or perceive they have been.

No matter how Brendan etc attempt to form unbiased judgements about how consumers should want to eat their cake, these are not the ones calling to homes, dealing with confused people, with fuzzy data on their affairs, researching, and reporting back, in a manner appropriate to the ability of the customer to understand. Then there's the question of acting on advice, taking risks, spending money on the future not the present. Like it or loathe it that's how people still want to have their affairs handled, and it costs money, a lot of money. Forget the net, you can't give comprehensive personalised advice on it. You can give oodles of information, but billions have been lost proving this point. People want advice, and they want it in person.

The fees versus commissions debate is just another blind spot area. The facts are that most customers simply don't want to pay fees. Those that do, except for the very high net worth, are not prepared to pay the true cost of funding human interaction, ie travel, meetings, research, reporting, regulation, overheads etc
.
Consequently in the UK, as in Ireland and America, the most common currency in delivering financial advice is commission. Yes the ugly C word. So what? What’s wrong with that, if it’s the way customers want it, if its disclosed, and if it’s been used throughout the 20th century for everything from stocks to property?

There is no way that customers will pay fees at the level necessary to get authentic independent and impartial advice. Except for the rich. To constantly bang on about it, without segmenting the market for advice shows only one thing - IGNORANCE. Unadjusted it shows PREJUDICE. Unfortunately the world of financial services isn't perfect, and can't be made perfect. So enough of blind blanket simplifications, like 'everybody should pay fees'. They don't want to, get it, they don't want to, so the real world has to be serviced with a combination of fees and commissions in mix appropriate to the end of the market being dealt with.

If you're genuinely interested in improving the lot of customers, try remoulding the existing reality, improving it, and not baying from on high on mountain tops, across to one another. Get down and dirty in the world of commission, recognising that the bloody thing works.

Fee

"There is no way that customers will pay fees at the level necessary to get authentic independent and impartial advice"

Put another way - There is no way the customer can afford to maintain my lifestyle in the manner to which I have become accustomed.

And Bottom Line there is downward pressure on those chunky commission rates you are happy to live off so what are you going to do?

Perhaps bottomline you are near retirement so the future doesnt really matter - you only live for the present.

S

Read again

Hi S, try to park aside your one eyed view that advisors are some form of overpaid, valueless occupation, and do the maths. Even plumbers and electricians have to cover overheads if people want a call out service, advisors aren't any different.

All sales now must be made after a fact find process. Individual reports must be prepared, then there's the transaction process itself. In between is the time necessary to listen to the customer, and respond to their anxieties and concerns. It takes several hours per file to give advice, and about €100,000 to fund a small office and staff, and thats before adding the cost of the lead advisor. Make that €200,000 all in, and it works out at a notional hourly billing rate that customers would not pay by fee.

To equate commission with conmen is simply prejudice, no other word for it.

Make that €200,000 all in

Bottom-line,

How many presentations do you have to make to realise one sale. In effect that poor sucker who is your sales success ends up paying for all the other wasters you had that day and who didn't buy from you!

Most knowledgeable persons would feel that commissions encourage unethical behavior. Fee based advice removes this uncertainty and I would believe that ethical standards and success go hand in hand.

"park aside your one eyed view"

Bottom-line, the perception you should be using is that of your audio senses and not your visual. Can you not hear it?

S

Poorly Informed

Sorry S but your just pontificating, without industry knowledge. In Europe where bigger brains than yours, and where a socialist, pro consumer mindset quite rightly operates, the issue has been tackled. The impending insurance and investment directive, allows for the operation of independent advice even where the customer pays by a known commission.

In other words S the EU agree that the market is complex, requiring fees, fees and commission, and commission only to operate.

Nobody can deny you your right to maintain an alternative view, even if its wrong, but one can reasonably expect more respect and less disrespect towards people that prefer to buy through commission, and towards advisors that respond and, yes, earn a living doing it.

Very well informed

Bottom line, insurance by its nature is dynamic, so surely you cannot say the issue has been tackled in Europe. Its ongoing. But where you may be correct is that we can look to Europe to see what lies over the horizon for Irish intermediaries.

In Germany, Italy, Spain insurance products are distributed through tied agents. But in the UK, Netherlands and Belgium like Ireland better use is made of 'independent' sales and brokerages.

"the market is complex, requiring fees, fees and commission, and commission only to operate."

Yes the market as a whole is complex. In France the Primary distribution channel for Life Assurance products are the banks at 61%! followed by direct sales and tied agents at 16% (where are the brokers?). Market concentration has narrowed the brokerage field. This has also resulted in market competition between insurance intermediaries intensifying - when you look into it you discover the reasons have been because of more stringent regulation (yes a version of what has been introduced here recently).

As competition intensifies the consumer will demand better quality and more transparent products. The broker in France (and there are not that many left over there) has that respect that you are craving for Bottom-line. Only the best and most professional survived.

In Ireland we presently have informed consumers that prefer to pay a straight fee. My guess is that gradually remaining poorly informed consumers will become better informed and the demand for fee based advice will increase.

The broker in Ireland who survives through sheer professionalism will gain the same respect. The others probably wont exist and there will be no need for discussions such as ours. But I think you know this already

S

Re: Very well informed

Bottomline, the basis for your views seems to be your experience and the experience of others concerning the payment for advice. It is impossible to contradict that experience and I would actually agree with you that most people if asked a basic question about fees or commission they would probably answer commission.

That said, my experience of running my brokerage and my former life on the insurance company side of the fence, is that most people have no idea about what commission means. That have no idea, even with disclosure, what commission is actually paid. There are countless examples of where greedy advisors, sales reps, brokers, accountants, estate agents and anyone else who used to sell insurance based products, would sell the highest earner for them and totally disregard the client. It must have been like taking candy from a baby.

The bottom line with commission is that it is ultimately paid by the client but is not made clear to them the impact v's nil commission. If I had my way (and I can't see this happening soon) I would make it mandatory that the clients fund value with and without commission should be shown beside each other. It is only when the impact of commission is explained to customers in simple English that they suddenly feel much better about fees and are willing to pay for quality service.

On the issue of the size of the fees charged, I can complete a 13 page fact find on a client, produce a 10-20 page report on their finances, including several iterations with the client, select with them the best product for their needs (from the whole market) and execute it on a nil commission basis for a flat fee of 400 Euro. It is possible to deliver quality at a realistic price but you have to change how you operate.

The insurance market is generally regarded as having room for improvement and I feel your attitude is demonstrating a desire to keep the status quo. Anything that was originally designed to hide the cost of advice is hardly the model to build a professional financial services industry on. Why do people pay doctors, solicitors, accountants etc fees? Would they sell more or be seen to be more professional on a commission structure - it is having a serious backlash for the legal profession.

Regards Michael

Authorised Advisor & Discount Broker
www.myadviser.ie

€400

You will be out of business shortly on that model, and I suspect your site is just another one in the pipeline of failures to attempt rules based financial planning. Time will tell, but I certainly wouldn't like to be a shareholder in your business.

The market for fees begins at the mass affluent, and in Europes most advanced market, Switzerland, Zurich Swiss record 22 hours on average, billing out each new client €2200, before other earnings. Here you're doing it for €400! Many people have left Life Offices in the past with the magic formula, and found reality a lot different. You're still on that learning curve, believe me. Sorry but until you show a profit you're model doesn't count. anybody can do business at a loss, it doesn't take genius, just stupidity.

Re: Typical Old World Arrogance

Bottom Line, you have got a neck but I suppose that your comments are easily made given your anonymous status. I have a lot of experience in this business and have seen several models of doing business go under. I officially launched August 2001 and have made a reasonable profit in my first full year of trading. That is not bad from a standing start for any business.

Don't be confused by my web site. It is just there to show people what is on offer and for those who are net savvy they can use some of the forms to communicate with me. I am not aware of many existing brokers who will be so open about their business. Most of my contact with clients is via the phone and post - not so complicated. Email is also used if that suits the client. I have even been known to meet clients face to face but this is rarely needed and if it is I charge €100 an hour for such meetings.

If you actually visited the web site you will see what is on offer and it has nothing to do with "rules based financial planning". I offer a very professional and independent service and am more than happy with the customer response (as are my shareholders), despite never having advertised. All my business has come from word of mouth.

Don't underestimate what you don't understand - but actually I will take that back. You keep thinking as you do because it just makes my job easier.

As my model has made a profit does it now count?

Regards Michael

Authorised Advisor & Discount Broker
www.myadviser.ie

Commission checker

Michael

Whats the point of your commission checker service if YOU don't know the commission basis, as you appear not to. See Ross's reply 19/9.

Lord only knows what misleading info you are disseminating. I know of no reputable commission based broker charging the commission rates quoted by you on pension business.

Dave

Re: Commission checker

Michael,

My congratulations on turning a profit in your first year.

Personally, I wouldn't bother disclosing such detail on a public forum such as this, to counter anonymous posts. I remember when I first started offering flat fee nil commission pension deals in 1998, I was told by similar wise old sages that my business model was unworkable, that I wouldn't make a living out of it and so on. If there are people out there who still believe that I can't be making a living out of it, let them carry on believing it, for all I care.

If you offer a professional, honest, value-for-money service, you will continue to succeed. I believe that you do and I believe that you will. It's the value-for-money, honesty and professionalism that counts, not whether you get paid by fees or commission.

Naturally, there will be those who will try to discredit you as has happened here, while hiding behind the veil of anonymity. Why do they do this? Simple! Because they feel you are a threat to their own business. And yet you and I know that a cleint will only move to another broker, if they cannot get the same value and service from their current broker.

I wish you many years of continued success with MyAdviser.

Regards,

Liam D Ferguson
www.ferga.com

None so blind

Sorry boys, that just doesn't stack up. You sell on the cheapest price and if its successful, the market will become crowded, pushing down margins further where only the big volumn players can survive, not boutiques aka one man shows. If it doesn't catch on which it hasn't as a profitable sector, you're just another noisey can, good for a media sound bite, and critical of alternative operators.

That's all been tried before. You're space isn't new. You are both ten years behind Hobbs, who despite setting out to make the same points and make room has abysmally failed. He is also a one man operator. But you're in good company. Keep trying, heaven help the innocent.

Commissions

Bottom-line you sound like a beeched whale struggling because of gross inefficiencies and large overheads.

I pity you but there is nothing I can do only to hope its quick for you in the end.

Sumatra

Ah Well

Time will tell. Beached I may be, but the evidence supports my position. Moralists like previous posters, and Hobbs, the high priest of fees haven't been proved right yet.

Fees vs Commissions

MyAdvisor, and other players are a welcome and healthy addition to a marketplace, that until recent years was devoid of these important operations. Bottom Line, you say that there is room for both, which is patently the case, but that's not the point. Despite consumer behaviour, fee based advice is simply better, a fact recognised by consumer groups worldwide. and it's a growing segment.

To personalise the issue is confusing it, but it's also quite wrong incidentally. Ten years ago, anybody breaking ranks with the 'industry' as it was defined was treated like a leper. Discussing commission scales with the media, or highlighting lousy advice like initial contracts, bombing out, endowment homeloans, and, yes, fees vs commissions, was treated as treason, culminating in ad hoc industry gatherings calling for agency cancellation etc. To say that the reforms haven't worked is just untrue, a lot of pensions business is now nil commission, some estimate as high as 20% to 25%, with a bigger number as spread commission.

Only a small proportion is still of the old front end type. Yes it's true that biased comparisons that show these against bargain basement offerings, without mentioning the way most of the market operates today is not the full picture, such comparisons are simply commercials. Nothing wrong with that - it's up to you to defend your ground.

Even on AAM there are those who innocently and genuinely believe that commissions are higher because of the cap removal, and that price controls should be reintroduced. This even finds voice in the media with Colm Rappel recently rehashing it, but it's false. While patently there's no ceiling, the price of disclosure, the reality is that competition has depressed margins - ask any Life Office. Also ask any volumn broker how much of his business is now full commission, and the frequency at which discounts have to be given, and the truth will emerge.

Players like MyAdvisor simply couldn't have existed before the push to disclosure. Without the disclosure debate, followed by Insurance Act 2000, there would be little public sensitivity to charges. To write off the past decade is wishful thinking.

Re: Fees vs Commissions

Dave, I do know the commission basis for this particular client and he is very happy with the outcome of his conversion to a nil commission contract. His original plan was set up with a long term but he is not a stupid person. He just took the word of his advisor and as Mith & Liam have said, there wasn't a lot of noise about charges and commission pre disclosure. The 2.5% x Term rule does apply and I didn’t reply because I thought Geller covered the point made. (I accept that his actual final commission level on his top up was not 50% but it was not far off. )

Mith is right, without disclosure and the Central Bank rules my business could not exist. It is very hard and not without it's cost to fight "city hall" and I remember well how Eddie Hobbs was treated over the years. Such enthusiasm for the cause of consumer rights in financial services, has to be commended. It will take a long time to make an impact on the status quo, so Bottom Line you should relax more. You clearly feel that discount brokers are no threat to you or your kind so enjoy life and maybe get out on the golf course more before the evenings get too short.

Regards Michael

Authorised Advisor & Discount Broker
www.myadviser.ie

fees v commissions

Congrats to all on a great debate.

At the risk of getting my head chewed off I will add some personal comments.

The fees v commission argument is frequently conducted on the basis that if one is right the other must be wrong. Being involved in (several) intermediary firms I think the answer is that different elements can suit different parts of the market. I do not believe that fee-based advice will ever cover all those that need financial services: therefore commission will continue to play a role in the market.

Commission is a reward for a product sale. Once this is clearly recognised by regulators and market participants (including consumers) many of the perceived difficulties with commission disappear. As consumers we are all happy to buy cars, phones etc. from people remunerated on a commission basis - because we understand at the outset what is involved.

Fees are a reward for advice rather than a product sale. In general people will pay for advice where they perceive a value to it. Accountants and solicitors for example work perfectly well on this basis.

The difficulty with fee-based advice in financial services is that clients are frequently left with the illusion they can get "free" advice particularly from institutions such as banks. In reality this "free" advice is a thinly disguised product sale. (The institutions providing it are generally not registered charities so one assumes there is an income stream for them from the exercise). Customers, once they figure this out, will always feel hard done by. Even if the advice provided is good the manner of its presentation will still leave a wised-up client with a feeling of unease.

Because the market provides "free" advice why should someone have to pay for it? Particularly if they have not previously had to pay for it. (Consider by analogy the resistance to bin charges). For this reason I believe surveys will show a resistance to fee based advice until it becomes accepted in the marketplace.

Fee based advice flourishes at the upper end of the market as clients are generally used to receiving fee based advice on a range of matters inside and outside the financial world.

I applaud the success of Michael and Liam in establishing a new business model.

I also think that some of the comments by bottom line deserve further consideration. The next great thing in pensions will be the PRSA with capped charges. As a result the commission rates will be lower and therefore the savings/refunds that can be generated for clients will be lower. For those relying on commissions this market may be uneconomical (I believe that conclusion was reached in the UK by many IFAs). For those relying on savings/refunds margins must also be reduced. The net effect will in my view force many intermediaries of all persuasions out of the market and therefore reduce product penetration. (Intermediaries account for about 70% of life and pensions business). This is surely the exact opposite of what the legislation is attempting to achieve.

Having thought about this for some time I have come to the conclusion that bio-diversity is as important in financial services as in the environment. Anything which has the effect of pushing players of a particular shade out of the market completely is ultimately to the detriment of the consumer.

Once again congrats on the debate and I hope these comments are of some interest.


Aidan

Fee based Advice

Aidan,

In the UK one in twenty pay fees. So 19 out of 20 prefer to pay commission.

1 in 20 is a sizable market for those who choose to offer fee based advice?

S

fees v commissions

Sorry for not replying sooner.

Your comment on the UK position is valid ... to a point.

It illustrates that there is a market for both fees and commissions.

Whether 5% is the full extent of the fee market is less certain. I understand that the regulators in the UK are looking at the possibility of allowing the IFA tag to only apply to those that charge fees. If this were to happen existing IFAs would then be forced to make a choice and I suspect the proportion of the market operating on a fee basis would increase.

The regime change in Ireland is still in its infancy. The Central Bank insists it will ensure that the public clearly understand the qualitative difference between an Authorised Advisor and a Multi Agency Intermediary. If this happens I believe the commission route will be primarily used by:
1. the unwitting who dont appreciate the differences involved or who are just interested in solving a particular problem e.g. mortgage related advice
2. the very knowledgable who will wish to dispense with commission
3. the impulse purchaser

I believe the third category will be served in the main by the large institutions;the second category will grow and will be serviced by a small number of intermediaries;

It is to the first category that the Central Bank will be addressing its advertising which in turn will become a mantra repeated by the financial press.

In that context I believe over time the fee based segment of the intermediary market will grow.

Commission based intermediaries will lose out as:
1. The commission attached to products is reducing
2. The top end of the market will migrate to fees
3. The lower end will be dominated by institutions with huge resources or low cost discount sellers.

The prospect of a commission based intermediary continuing to generate an adequate living will be reduced
in those circumstances.

I would not agree that the loss of commission based intermediaries is good for the market. I believe they provide choice to consumers. However I do believe there will be far fewer such providers in the years to come - UK experience would confirm this.

Regards,

Aidan