Fees V's Commission

Fee based advice

Hi Aidan,

As far as I kow the whole <!--EZCODE BOLD START--> Authorised<!--EZCODE BOLD END--> Financial Adviser notion has been scrapped in the UK and IFA's can be remunerated by commission, fees or both. I think that they are going down the 'Payment Menu' route.

Interesting stat from Chris Heath of Limra International

<!--EZCODE QUOTE START--><blockquote>Quote:<hr> In Australia advisers decided to change their business model, and find clients who would pay fees. Financial planners raised their game, and added value through their advice, which was totally separated from product sales. Their advice commands levels of fees that would be charged by an accountant or lawyer for a serious review of all of the clients affairs.<!--EZCODE BOLD START--> Such planners lost two thirds of their clients, but ended up making twice as much profit.<!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END-->

fees v commissions

Interesting comments on Australia - do you know of the raw data source??

One comment I would make - intermediaries that try to switch from commission to fees generally suffer in the initial stages as:
1. their existing clients have to adjust
2. the intermediary has to learn new ways of doing business.

One of the biggest things fees highlights is that a number of clients are just not profitable. Whilst it is alien to many intermediaries you just have to walk away if it doesnt make financial sense.

Regards,

Aidan

Re: Newstalk 106

Did anyone else hear a rather dissapointing & superficial debate on 'fees vs commissions' on Newstalk 106 breakfast show with David McWilliams this morning?

There was no mention of 'authorised advisors'. The panel seemed confused about new UK FSA regulations - One contributor stated that in the UK, advisors had to show the commissions that would apply TO OTHER ADVISORS, which makes no sense (I presume it should have been commissions from other alternative products).

I think they need to get the real experts on that show!

FSA drops Defined Payment for Aifa's Menu

The Defined Payment System has been scrapped in favour of Aifa's Menu approach to the remuneration of IFAs, the FSA has announced today.

It had been known for sometime the regulator has been minded to drop its proposals in the face of massive opposition, but until now it had not decided between Aifa's proposal and the Sandler review team's alternative.

The system will still be called DPS, but crucially, it will allow IFAs to be paid through commission.

The menu will be a document presented to clients in the early stages of the sales process. It will outline the services offered by the IFA and the options by which clients can pay for advice.

There will be a consultation on draft rules for the option next year.

The regulator is aiming at expanding it across all channels rather than just for IFAs.

FSA head of retail projects David Severn says: "Some constructive proposals came forward in the responses to CP121 and, of those, the "menu" option offers the best route for us to achieve our objectives. Importantly, it will ensure that the form and level of adviser remuneration - and scope for
negotiation - is signalled to the consumer up front."

Source : MoneyMarketing - 28th Oct. 2002

Re: Commission Disclosure

The menu option sounds like a good one once it is clear to a client, regardless who is doing the advising/selling, the level of commission being charged.

My attitude to commission is that it has been designed into products largely to disguise the cost of the advisors role. Even with disclosure this is still the case.

Until commission is taken out of a clients plan and shown as a unique payment/charge on their annual statement, it is still being hidden. If the advisor/sales person is confident about the service and advice provided the they would have no problem disclosing commission throughout the life of the plan. It would not be rocket science for the life companies to provide this information, as they already do so with commission statements.

My experience is that most customers do not have any idea about the commission being charged. It should be required by law to provide annual statements to clients on their plans and the commission for that year should be highlighted.

This should apply to all plans new and old.

If such an approach was taken I believe that the acceptance of fee based services would start showing much higher acceptance in consumer surveys then it does now.

Regards Michael Kiernan
Authorised Advisor & Discount Broker
www.myadviser.ie

Trailer Commissions

On a related subject, can someone please justify the feature on many bonds whereby the management charge will vary depending on whether the broker charges a trailer fee, typically .5%.

Who on earth agrees to pay this "optional" extra charge and what on earth are they told they are getting for it?

My guess is that the people who pay this charge are duped into believing that it is not optional, that it is entirely normal. My further guess is that it is the more vulnerable in our society who fall for this line. Ironically, the more sophisticated will know that they don't have to pay it and they won't pay it and moreover they will be more demanding of the service which they receive from their broker and probably negotiate a reduced initial commission to boot! The suckers who pay the extra charge, far from getting an enhanced service, probably get the most minimal of attention.