This extract from the The Times (June 26, 2009) caught our eye.
Thousands of financial advisers will have to overhaul their businesses or face extinction after the chief City regulator sounded the death-knell for all commission-based advice.
The proposals will result in dramatic changes for advisers and product providers as the Financial Services Authority (FSA) attempts to repair the damage caused to the industry by successive episodes of commission-driven mis-selling. In its consultation paper on the Retail Distribution Review (RDR), published yesterday, the FSA said it would introduce much greater transparency into the sale of all investment products.
Advisers will have to get to grips with a huge shake-up of their business model, where about 80 per cent of payments are through commission, and prepare for a switch to fee-based advice.
The FSA intends to demolish a payment structure where providers such as unit trust groups and insurers include commission in many of their products as an incentive for advisers to recommend them. There would be a ban on financial groups offering commission to secure adviser recommendations. At the same time, advisers would not be allowed to champion products that automatically pay commission.
An FSA spokesman said: “Our aim is to ensure that inbuilt commission is basically removed from financial products so that customers can clearly see that there is one charge for the product and another, separate charge for any financial advice.”
He added: “Payment to an adviser from an investment product will not be totally eliminated, but it will have to be agreed by the customer in advance and will very clearly come out of the customer’s investment.”
The current lack of transparency has left some consumers with the impression that commission-based advice is free.
There will be a clear distinction between independent advisers and what the RDR terms “restricted” advisers. Independent operators will be those who are free of any bias and who can recommend products from across the whole market. All others will be in the restricted category, which is likely to include staff selling products in bank branches.
All advisers, whether independent or not, will have to reach a minimum qualification, which will be equivalent to the first-year level at university. There will also be a professional body for advisers.
The clear winners from the RDR are fee-based advisers, who are already offering transparency with their charges. Andrew Fisher, chief executive of Towry Law, a wholly fee-based adviser, said: “This spells the end of commission-based advice — something we have been campaigning for for a long time. It’s a great step forward for consumers.”
There was a broad, if somewhat lukewarm, welcome for the proposals in the investment industry, though some financial groups expressed concern about whether less well-off consumers would be prepared to pay for fee-based advice.
Fiona Fry, regulatory partner at KPMG, the accountants, said it was vital the FSA made a success of “guided” sales, the low-cost alternative to independent advice.
Are you paying for financial advice? No – well you should be. Financial advisors have in the main been commission earners. The industry is now expecting the demise of commission in the not too distant future. The good news? Your advisor, if being remunerated directly by you should be completely impartial about which financial institutions product they recommend. How much to pay? You’ll have to figure that our for yourselves but shop around and get recommendations before you decide. We like the idea of an advisors fee being recoverable by the financial saving and or investment growth they acheive for you…
