Commission – I don’t understand it either!
If you know anything about me and the firm, you will know that from inception (1999) we removed commission from all financial products that we arranged. This was due to wanting to remove bias between financial products and provide better arrangements for our clients. Admittedly ahead of our time and it wasn’t until January 2013 that commission had to be removed from investments as a result of the regulator’s review of the market.
Yet only this month (January 2015) I am wrestling to understand commission on a tiny life assurance policy that I have arranged for a client. Long story short we asked to remove the commission as usual (reducing the monthly premiums by about 30%). However it appears that in this instance, the insurer only removed “initial commission” and when the terms came through, the renewal commission of £1.06 per month would be paid to us from month 49… until the policy matures in 10 years time. In short we would potentially receive commission of £1.06 a month for 95 months…. not exactly a lot of money, but not what we promised! So I request that this commission be removed, only to find that the monthly premium is reduced by just one pennny a month… rather than passed directly onto the client as I had assumed. In this scenario, the insurer merely keeps £1.05 a month extra as pure profit. Bonkers! OK I know its not a massive sum, but then that’s just because this was a small policy, the cheapest from the market, but multiply it by millions of customers…
So, it would seem to me that I should take this extra commission (not payable for 4 years) and either pass it all to the client or offset it against his fees, but to my mind this merely demonstrates how behind the times some product providers are and why I believe that so few of them have the remotest chance of surviving another thirty years. As for the regulator, in their infinite wisdom, the commission ban only applies to retail investment products… not insurance… no, I dont understand it either!
There are times when I feel quite despairing. The regulator has had an initial go at reviewing the effectiveness of RDR, the new world that was meant to result in better advice, greater clarity and fewer problems. It would be fair to say that there is a wide range of views on the wisdom and merit of RDR as is has been “delivered”. My own opinions aside, the regulator is concerned that investors (that’s you) do not understand percentages. Now call me whatever you like, but if an investor does not understand basic maths, then they really have no place investing their hard earned money. I’m not talking about complex percentages, such as how to put in plain English the interest charged by payday loan companies that the new Archbishop of Canterbury is attempting to address, nothing as complex as that. I’m talking about working out what 1% is. Yes calculating what 1% (one per cent) is. The regulator does not believe that investors can do this simple sum of moving decimal points two to the left. One per cent of £100,000 is £1,000 (just to be clear).
Now, if things are really as bad as this, then surely the entire education and financial system has failed miserably. Little wonder that politicians do not understand the difference between deficit and debt or how to spot a rip off and how to work out the budget for their own department, rather making the expenses scandal look more like a haphazard attempt at a maths problem. Surely we are all rather brighter than the regulator seems to be suggesting.
So here’s a test, which is bigger?
- 1% of £200,000
However, the truth is not that this is really about your ability to do sums, but about the framing of information. In fairness to the regulator, this is actually about fees that advisers charge. Its will cost you £2000 sounds different from saying it will cost you 1% of your £200,000. A cynic might suggest that there is an agenda here, but given that many things in life work on a percentage, income tax, capital gains tax, inheritance tax, annual management charges, dividend tax, bonuses, stamp duty, tips, inflation, gdp, interest rates, loan-to-value, electoral majority, and a gazillion other examples one wonders why this really is made into such a “big deal”. This in the context of an investment world that seems obsessed with stochastic modelling and probability… which are far more complex terms to grapple with, let alone the mathematics of standard deviation and the normal distribution curve. I wonder what percentage will be used to assess whether RDR has been a good thing, in terms of how many more people seek advice and how many are removed from reliance upon the State….
Dominic Thomas: Solomons IFA
RIP off Britain – Retail Investment Products, Advisers, Clients Rest In Peace?
Those of you that occasionally read my blog or any of the financial press will be aware that since 31st December 2012 financial services in Britain underwent a major reshuffle (RDR). This was intended (correctly in my opinion) to raise the standards of advisers (thereby leading to better advice) and also ensure that they were not biased in their advice. This was meant to be so that the UK consumer would get a better, clearer understanding of financial products and financial advice in general. Sadly, it is my opinion (admittedly only 3 months into the new regime) that this has failed.
I would be one of the first to agree with the FSA that product and provider bias was rife. In my opinion, the only way to address this was to charge the same irrespective of the product or provider – which I did from the very day I set up Solomons way back in the last century (1999). So this has been perfectly possible for a long time. This meant that as the adviser the product selection was based on what the product could do, not on how much I would be paid. Sensible I thought (as did/do clients). However this still relies on products being arranged, sometimes this is not sensible or necessary and smacks of selling products, not necessarily doing proper financial planning. Hence why I charge fees for service and advice.
Sadly there were relatively few advisers operating in such a way and even fewer doing proper financial planning. I estimate that perhaps 90% were “old world” up until around 2010 when many of them really did have to begin to address their own business model. So “RDR” was going to be a significant challenge to many advisers. After all, how does one change a business where a £200 a month pension earns commission of £1500, but has clients without £1500 to pay a fee to set up a pension for £200 a month. To say that a few advisers had not done their own sums would be a considerable understatement.
Sadly, the regulation which came from a well-intended place has become hugely complex. We all knew the numbers of advisers would reduce. Today the regulator admitted that more had gone than they expected (20%) and if you went to a Bank, there are now 44% fewer bank advisers (and falling, as most Banks cannot offer a cost-effective service). Add in to the mix, VAT on fees, fund managers using the opportunity to increase their charges and pour blame on RDR, fewer more qualified advisers and basic economics tells you that supply and demand have altered. Less supply, greater demand = higher costs. Add in higher regulatory costs and processes designed to prove good practice and avoid getting into trouble with the regulator, a smaller market of advisers… then costs for IT, compliance, consulting and any bright idea have all increased way above the rate of inflation. Chuck in what is tantamount to blood money – a share of the compensation bill for firms that failed to serve their clients and went bust (or the product did) for millions to be shared across a smaller number of firms and you get a sense of the “pressures” that advisers are now under (which is why we have little choice but to employ compliance firms that advise, but don’t actually take responsibility). Hence adviser fees have risen and for some people, it is the first time that they have ever paid their adviser a fee.
So, at this point in March 2013, I see little evidence to disprove my belief that more people are being ripped off than before. Fewer people will get advice, many will resort to DIY advice, which I can understand, but invariably has very poor results that make investing more expensive not less (check out Dalbar.com). The new rules, for some reason best known to the regulator, only apply to retail investment products, not all financial planning products. It is still possible for advisers to earn commission from protection products such as life assurance, income protection and critical illness cover – and yes the premium will dictate how much commission is paid, which still (strangely) varies between companies. Oh and if I agree to provide Fund Management group XYZ with £xm this year I can get a better deal… you what? (no I don’t). So if I seem a little pithy today, what with the end of the tax year rapidly approaching and a tonne of new papers for clients to sign to simply top up an existing pension or ISA, please excuse my cynicism, but I fail to see how clients have benefited from this, which is surely what any decent adviser will be thinking and having to explain. Mind you there will be plenty out there fudging the difference between an IFA and a restricted adviser (the only two permitted forms in a binary choice of really representing you, or partly representing you). Still, its no joke that on 1st April (April fool’s day) the FSA changes its name to the FCA… and we all have to reprint our stationery.
Dominic Thomas: Solomons IFA
Independent financial advice
This morning I attended a mini-conference run by the ICAEW helping financial advisers to ensure that if they hold themselves out to be independent, that they do indeed provide independent financial advice. This is a hugely important issue and so I was a little surprised to find that there were not many in attendance, perhaps because it was a pay-for event, or of course, perhaps many advisers felt that this was not a pressing issue for them.
New rules are black and white
Independent financial advice is important to me, because I believe it enables me to provide a far better set of solutions for clients – being unrestricted and therefore the widest number of options. The new year saw a clear regulatory distinction between the types of licensed financial adviser – either independent or restricted, not a mix or a fudge. There was helpful legal insight from two Barristers who helped unpack the nuts and bolts and attempted to put this into plain English. One would have thought the distinction should be fairly straight-forward, but as ever, words and phrases are open to interpretation. One position might argue that to be truly independent, the adviser must consider all forms of investment products from the entire planet – including those not written in English. The FSA define independent financial advice as:
This it the litmus test for independent advisers. This is built upon a series of basic principles of being a faithful fiduciary and legal test cases of what constitutes a professional adviser (in any field). This is of course what I do have done for clients – the main issue being one of applying a degree of common sense and filtering out options that are either certainly or highly likely to be unsuitable investments for a client. By way of a silly example, a ponzi scheme would be an unsuitable form of investment in my opinion.
Independence should not be compromised
The problem with all advice is that the end result takes many years. One of the many reasons I spend time with clients reviewing their planning, is precisely because things change and we need to revisit assumptions. We have to apply common sense and frankly a high degree of transparency and not hide the reality of performance, charges or choices. The new rules don’t really make a lot of difference to our clients in terms of our transparency, however many firms are unable or unwilling to do the work to be independent. I admit that the work can be onerous, but be warned that dismissing the new terminology as “nonsense” is a mistake and folly on the part of any adviser. Sadly many of our “trade bodies” are now also fudging the issue of independence, which is why I do not belong to them and joined IFA Centre, which promotes the value of independent financial advice.
Going deeper and further
I would suggest though that the issue of independent advice doesn’t really go far enough for me, impartiality is more difficult to achieve as it precedes investing. I would suggest that it is not only vital to be independent, but also vital to be impartial – by which I mean, being open to the notion that paying off debt might be a better use of funds, or making “investments” into a variety of “things” that don’t come under the remit of financial advisers – such as buying art, residential property, a business or even giving the money away. This is why I attempt to distinguish between financial planning (creating solutions and options to solve problems or objectives) and investment advice, which by its very nature assumes that investing in traditional financial instruments – stock markets and bonds is the appropriate solution. I want bigger, deeper and wider conversations with clients about their values and priorities so that impartial advice can be provided. This is, to my mind a better result.
Just A Few Days Left… until Retail Distribution Review
Most of us now buy a large proportion of our Christmas gifts on-line. Those that have not planned ahead, may have an anxious wait for the parcels arriving during the busiest period of the year with only a couple of weeks left. In a similar way, advisers have been awaiting RDR, the Retail Distribution Review which is also only a few working days away now. It officially starts on Monday 31st December 2012 (that’s in 24 days time). Sadly, whilst full of noble intentions (clearly priced advice, better quality advisers, clearly defined types of adviser) I regret to say that its a complete shambles across the majority of the financial services industry.
What The Dickens?
You need proof of course, but take Nationwide. One of the few mass-market banks/building societies that has intentions to provide advice going forward. Most Banks elected not to do so as they priced their hourly costs at over £250 an hour, which of course is not likely to be afforded by most of their customers, who are likely to scream “more? you want some more?” in that Oliver Twist way as yet another way of extracting cash from unsuspecting customers is served up like a warm bowl of gruel. So in practice most people will no longer be able to go to their bank for advice; (I want to say that this is probably a good thing as bank advice generates the most complaints and most advisers would probably say isn’t as good). That’s a half-truth though, they have more complaints because they have a lot of customers, as for being as good – well some are, some aren’t as with all other advisers. The reality is that it should be the case that getting advice is better than not getting any, so even the Banks have a role to play.
Get Your Goose? Walks, Talks, Sounds, Smells and looks like…
Sadly, due to the way that the FSA have approached “adviser charging” this has created a raft of problem with pretty much all financial products requiring an upgrade and re-think. It is concerning that Nationwide have today announced that they are suspending their pension advice because even at this stage they don’t have the ability to offer an RDR compliant pension. They know that they want to get 3% for the “advice” and 0.5% for ongoing “advice” but bluntly to anyone in my industry this looks very much like a product selling approach. To those in the know, this is akin to “if it walks like a duck, speaks like a duck, looks like a duck… it is a duck”. To enlightened advisers, this would raise the question of Nationwide’s leadership, culture and governance to have allowed matters to get to this point with this “approach” and that is putting it very politely. Natiowide are reported to have about 460 “advisers” and are looking to get the number over 500. in the meantime Nationwide have said that customers wanting a pension should go to speak to an independent financial adviser… which of course Nationwide is not and from the end of the month, will be offering “restricted” adviser solution. As of this moment, their website has not been amended to reflect this fact.
Who hasn’t delivered… Santa or Sants?
Santa will not be bringing you a pension from Nationwide this Christmas, largely thanks to the way Mr Sants (who is seeking new employment) has decided to interpret and apply RDR. Mind you, its not as though there’s a queue of people asking if they can have one. Pensions aren’t really in that naughty or nice discussion are they? So credit to Nationwide for being nice by suspending pension advice, although of course if they hadn’t they would have probably been found out as rather naughty and on an entirely different list. Mind you, Nationwide are “on your side” this Christmas.
The RDR Advice Gap
You may have heard of something called “the advice gap”. This is a relatively newly coined phrase used to describe the expected result of the FSAs Retail Distribution Review. The accusation being that as a direct result of RDR, fewer people will receive advice. Why? because in order to receive advice, clients will have to pay a fee, commission is banned. You would be forgiven for assuming that I would be delighted by such news – after all, I set my firm up in 1999 on a fee basis, our clients pay fees. True. However my clients are not “average people”. They have wealth and want to use it to enable them to improve and maintain their lifestyle for the remainder of their life. They are forward-thinking and responsible. They are independently minded and not reliant upon the State (or presumably a fairy godmother) coming to the rescue.
Complexity Breeds Paper
As I have said before, my clients are therefore not the “norm”. There are many people that have great difficulty with their finances and have little understanding of or the ability to apply many financial planning concepts. The cost of providing financial advice has soared. Unlike many other professionals (doctors, lawyers etc) financial planners cannot simply provide one page prescription. There is mountains of paper justifying why something needs to be done, how it has been selected and so on. This is largely to satisfy the regulator and also a future court of law, should a complaint be made. Neither are terribly inspiring reasons are they? In addition, all advisers have improved technical skills and the financial landscape has become ever more complex, with the need for ever more expert guidance.
End Of The Free Lunch
RDR was intended to break the relationship between the product provider (pension/life insurance company) and the adviser which could be manipulated by extra or different commission between products. This created a decidedly uneven playing field and provided precisely the motivation in 1999 for me to create a level playing field so that there was no difference in our charge, irrespective of provider or product, thereby demonstrating impartiality. Frankly RDR could have simply stopped there. However from January all advisers will have to charge a proper fee, ending the myth once and for all, that advice is free. Unfortunately, advice and service is rather expensive, despite the many advantages that technology brings to efficiency of productivity. As a result, many people will be understandably put off paying fees, in the same way that many are put off paying for a dentist, or eye check up etc. It is also the case that good financial planning needs regular reviewing. A distinction between a financial planner and a financial adviser is probably that the former doesn’t really focus on products, and provides a regular review service. An adviser, well probably could be a one stop shop – sorts a problem but doesn’t really join everything together. Why regular reviews? well think of your planning a bit like a plane flight, one degree off course at the start may not make much difference for a few miles, but if not corrected will ensure that you don’t make it to your intended destination. A financial planner is like the pilot, adjusting the financial architecture regularly to keep on track.
In practice this means that many people on average or below average wages will probably not pay for financial advice. They will be forced to do-it-themselves. As a nation, we aren’t good at looking after our own long-term interests when left to our own devices. Think of all those gym memberships in January. Of course, some people are, but most simply lack the required discipline or knowledge and let’s face it finance is fairly dull, (OK very dull). I recently attended a talk by a well known adviser who writes in the national papers who summed up his 40+ years of advising people with only one couple investing sensibly when left to their own devices. However, this couple sat down every day to review their portfolio. To my mind that is not financial planning, that’s investing and terribly stressful and rather a waste of life.
Another Banking Crisis?
To compound the problem, Banks are not trustworthy and most will not be providing financial advice, earlier this year (or perhaps last, its all such a blur or excitement) analysis was done that revealed that the cost of a Bank providing advice was at least £250 an hour. Given the current climate, can you see that working? no? neither could they – so they have stopped providing advice to all but their high net worth customers, though I have no idea why these people use them as the Banks are really rather poor at advice and service. Coincidentally, when the FSA ceased their own final salary scheme in March 2010, they offered staff the option of seeking independent financial advice about their options offering £250 towards the cost of the consultation. This at least acknowledges that independent advice is best, but clearly fails to appreciate the cost.
Back To The Future
Just to put a final twist on things, from January advisers will either be “restricted advisers” or “independent advisers”. In other words back to polarisation that should never have been scrapped in 2005. It only enabled Banks to sell more stuff that they weren’t able to understand. This has led to the term “the advice gap” which simply put means – people that won’t or cannot afford financial advice. Most financial planners will have to focus on their more wealthy clients, yet very few (and I really mean a very small percentage) actually have a workable, sustainable business model that enables them to look after clients properly and profitably, ensuring that they are there to do the same next year. Fortunately for me, I’ve been developing and improving my business and services since 1999, so have a rather long head-start on most.
Technically RDR comes into effect on 31st December. So that’s just under 4 weeks time, but allowing for the Christmas season – rather fewer days. The House of Lords has finally begun to understand the implications of the advice gap and has been debating the topic, in a typically empty looking House. Interest is frankly nowhere except within the industry, but it does or rather will have a dramatic impact on everyone in just a few days time.
|1990: Tie Me Up, Tie Me Down
Banks to leave financial advice to IFAs
Banks have been declaring their hand for the new financial world from 1st January. Last week Santander announced that they would only be offering investment advice to those with £25,000 or more and only from the range of products that they produce. In short they sell what they make. I’m always amazed that anyone would actually go to a bank for financial advice, but hopefully from January at least it will be clear how little a part of a proper conversation they are even able to entertain.
Too expensive for Bank customers
This was on the back of Lloyds also announcing that they are scrapping their services to anyone with less than £100,000 – again, why would anyone with £100,000 go to Lloyds for investment advice is beyond me. Barclays had already announced that they will not offer financial advice, except via its wealth management team, who focus on ultra wealthy (and presumably fairly easily pleased). HSBC will scrap their tied advice and provide execution only services (meaning you order what you want and they sort it out), they intend to remain whole of market, though frankly I don’t see how this will work in practice. Royal Bank of Scotland has abolished its independent arm (if you could ever find it) and going for a restricted model (limited financial products). Nationwide, one of my favourite Building Societies, is going to give it a go at offering fee based advice. It will be interesting to see how they get on and I imagine that the other Banks will be watching carefully.
Limited options for most
So in summary, the new rules about providing advice mean that the vast majority of people living in Britain will not get any form of independent advice. They probably won’t get an awful lot of option for restricted advice either. That of course is one way to solve the problem of mis-selling and scandal (reduce the choice) but it doesn’t seem terribly well thought through to me. We need a society with better financial education and greater access, not less.
|2011: Miss Representation – Newsom
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|1946: Stand Up And Sing – Rogell
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