We can see what we pay our doctors or lawyers. But until now few people have known what they pay their financial intermediaries. In a sense they have never been paid for drawing up a financial plan; they are paid for selling a product. It is no accident that if the right plan for you is to pay off debt, your adviser/broker will still steer you towards a commission-bearing financial product. There is often only a tenuous connection between the work the broker does and the commission. The commission on a big case could equate to the rate payable for 30 or 40 hours’ work by a lawyer when it involved a couple of hours of actual work.
The Retail Distribution Review (RDR) is supposed to change all this, as it replaces commission with fees. But there will still be a disconnect between the fee and the amount of work involved as it will allow a fee based on assets under management. I accept that genuine investment advisers who manage the portfolios of their clients can earn an asset-based fee. But increasingly financial advisers are pulling out of investment advice, leaving it to designated fund managers, or else they simply pull a lever and regurgitate advice spoonfed to them by Acsis or some other investment service. And the client has to pay for this service on top of the adviser’s fee.
I was excited to see that PPS Financial Planning has introduced a standalone financial plan. It has its own fee and there is no obligation to use any of the ancillary products. Once the plan is compiled the clients are free to use anyone in the wider market to implement it.
I would love to see if the financial advisory trade is going to be viable without the income from financial products. Whatever you might hear at conferences, drawing up a plan is an event, like drawing up a will. It should not have to be reviewed on a regular basis because, as we keep hearing, it is essential to stick to your plan.
But product commission remains the bedrock of broker remuneration. According to research from Masthead, a firm of practice management consultants, 69% of advisers (paradoxically) do not charge advice fees and most seem reluctant to start charging — 42% are “concerned”, 44% have some work to do before they can do this and just 8% are very comfortable to introduce fees.
At least the market is starting to work on single premium commission. It is set at a maximum of 3%, but 80% of advisers charge 1,5% or less. The chances are that adviser fees, unlike commissions in the past, will not be regulated. There is a strong contingent of advisers (45%) who want a regulated hourly fee, but 55% do not, primarily on the ground that practices and the services that they offer are different, and the complexity of client needs should determine the fee. But just 14% of the No votes believe the free market should set fees.
RDR will need to tread carefully to keep the adviser trade as an attractive career option. Almost three-quarters of advisers are over 40, and 44% over 50. Upfront commissions are an important part of their pay: 57% of advisers earn more than half of their income from new business and for 55% of advisers more than half their new business income is upfront commission. There will be a cash flow crunch for advisers. Maybe it is time for those who can’t honestly say they add value to find another career.
Ian Middleton, Masthead’s MD, argues that an advised consumer is better off than one without advice. But financial planning so far is confined to the elite and the current model is too expensive for the middle class and the poor. It’s time for a mass market planning solution.