Are financial advisers to be trusted?

The FSA say savers are being ripped off by financial advisers who, rather than take an up-front fee, earn commission on what they sell. John Burke reports
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The Independent Online

The Sandler inquiry into the long-term savings industry has made many savers realise they are being ripped off by their advisers, who may recommend a financial product due to the commission it pays the salesman rather than whether it is right for the customer.

Now some members of the the Financial Services Authority (FSA) believe the description IFA (independent financial adviser) should apply to those who charge fees – debarring those who insist on charging commission. And surveys show that few people are willing to walk into an adviser's office and pay a flat fee before a word has been uttered.

A prime object of the Sandler inquiry, which started in July, is "to ensure that consumers are well served," and his consultation paper said unequivocally that "costs and charges are poorly understood by consumers". It added: "Consumer research to date has tended to conclude that consumers are unwilling to pay for advice directly through fees. Commission arrangements have therefore been the norm in the industry.

"The situation is further complicated by the fact that providers pay different levels of commission for different products and also for different channels. In practice, most consumers do not understand that they may end up paying the commission cost through the front-end charge."

This partly explains why the industry is so loath to relinquish commissions. Nevertheless, although fee-charging is still fairly rare, many in the business believe it will increase. The 1 per cent maximum commission imposed by the stakeholder pension regime is squeezing the rest of the market. And mis-selling scandals have sparked a quest for better standards.

Withfee-based services, the usual method is to charge for time. This seems to range from £75 to £150 per hour, although purely clerical servicing should cost only £45. Another approach is a monthly or annual retainer up to £5,000-a-year. However, fees can also be based on the value of a client's assets. Nelson Money Managers broadly charges an initial 2 per cent of a client's fund, less for advising on more than £100,000, and then 1 per cent a year – but it does rebate commissions to clients and equity broking commissions are only 0.4 per cent.

Jason Butler of Bloomsbury Financial Planning says: "Our typical charge for the initial financial plan and associated advice and coaching is £5,000 payable in advance, although we have charged as low as £2,500 and as high as £15,000. We provide an unconditional service guarantee, which means that we will immediately refund any amount of our fees the client deems appropriate, if they feel that we have somehow not met their expectations or given good advice or service."

How does this compare with commissions? One adviser reckons that putting £100 per month into a unit trust over 25 years would be worth £900 to the salesman at 3 per cent commission. The right plan could be arranged instead for a fee of £300, based on two to four hours' work. Using the same time to select and arrange an endowment policy – say, with premiums totalling £30,000 – would cost one-fifth of the loading on a straight sale. That generates commission of £790 up front; £680 in renewals.

The issue has divided the industry. Brett Williams, managing director of Old Mutual's Project Mars, says: "The complexity of providing the consumer with appropriate investment advice is worth paying for. Investors accept this, but are reluctant to pay fees. This means the IFA must rely on commission to earn his daily bread, and it is wrong of Sandler to question this."

And Jupiter Unit Trust Managers have told Mr Sandler: "Providing the customer understands the implications of their adviser receiving commission from the product and it is disclosed as against the payment of a fee, we see no reason why this practice should fundamentally change."

Some, however, argue the system will have to be modified. John Turton, head of life and pensions at the IFA Bestinvest, says: "We believe (annual) commission is the way forward because huge front-end commissions will bring the industry to its knees. It is the wrong way to receive income." The Association of Independent Financial Advisers (IAFA) has 6,000 corporate members whose 16,300 qualified practitioners have 70 per cent of the market. Their director, Paul Smee, says: "The client should always be given the option of paying a fee instead of letting the adviser take commission."

John Miller, managing director of Anchor UK with offices in Bedford, Milton Keynes and Dewsbury, adds: "I suspect most intermediaries, unless greedy, would prefer to work on fees rather than commission. Half of what we do is personal lines and that can be for a flat fee." Simon Bolam, who runs Ranson in Edinburgh, says: "I sell personal and small commercial cover in a low-rate area with an average commission of 11 per cent. To be viable, I openly add a flat charge of £8 and I would much prefer to sell insurance net of commission."

He is a past chairman of the British Insurance Brokers Association (BIBA), whose spokesman, Jennifer Weller, says: "Our 2,500 members are more than points of sale – they also point consumers in the right direction. We do not know how far our membership is into fees, but this is becoming an issue that may well be addressed shortly." Financial advisers that offer the option include Bates Investment Services in Leeds when selling life, unit trusts and bonds.

The FSA insists that any investment adviser must disclose commission, but the alternative is not always seen as ideal. Whitechurch Securities in Bristol is prepared to charge fees at the large end for portfolio management, its leading service. But one of its senior managers, David Davies, says: "The time involved in basic planning could cost more than the dwindling commissions. And clients might baulk at writing a cheque for £100 for a mid-afternoon session. The future is likely to see some kind of charging compromise."

A similar view is taken by Ray Boulger, senior technical manager for the Bradford & Bingley's broker Charcol. "Although consumer groups are lobbying for fees as being more transparent, there is a lot of misconception. Most clients will concede that advice merits a commission, as that way they spend nothing unnecessarily beforehand... they may visit three intermediaries before choosing a fourth's recommendation."

Charcol meets the Mortgage Code in disclosing its fees for its specialities, home loans and linked insurance. The minimum fee is £250 and the maximum 1 per cent, although the average is half that.

The Institute of Financial Planning, whose members range from stockbrokers to solicitors and holds exams for potential money planners, gets 200 inquiries from the public about fees every month.

David Hanratty of Money Managers says thatmost of the income products sold by commission-based salespeople are equity based. "They ignore the principles in their search for commission and clients end up with strategies that are inherently flawed," he points out.

Perhaps the most radical suggestion has come from Britannic Asset Management, which this week called on the Government to give the poor free financial advice. Francis Ghiloni, Britannic's sales and marketing director, says: "Controlling pricing structures through CAT, ISAs and stakeholder is missing the point. It would be far more meaningful for the Government to provide access to free financial advice on a means-tested basis. This would be a more effective use of taxpayers' money than initiatives such as baby bonds."

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