The details don't really matter. You don't need to be a financial expert to understand what was going on. It's just human nature to want to make more money rather than less.
Generous commission payments caused the pensions mis-selling scandal. Almost 10 years after it started, the vast majority of all financial services sales people and advisers are still paid commission.
It is worth understanding how the system works so you can see what motivates the person who is advising you. Then you will be better placed to find someone you can trust to give you impartial advice.
Who gives advice ?
There are two sorts of people who sell financial products (such as endowments, life insurance, PEPs and pensions). Some sales people work on behalf of one company. They are either employees who are paid a basic salary, plus commission on anything they sell, or they are self-employed but authorised agents for a single company. These people are even more dependent on commission than salaried staff.
Then there are independent financial advisers (IFAs). The vast majority earn their living through commission payments from anything they sell from a range of providers.
Most commission paid to tied and independent advisers comes from your premiums, say from money paid into a pension or PEP. On pensions, a large percentage (or even all) of the first year's premiums can be eaten up by payments made to the person who sold you the policy.
A few IFAs charge a fee for their advice and may rebate some of the commission they earn on any sales. These firms tend to concentrate on the upmarket end of the business.
Kate Gill is chief executive of the Institute of Financial Planning. Her members are fee-based and prefer to be called financial planners, rather than advisers. They are more highly qualified than most commission- driven IFAs. "There is a difference between planners and advisers," Ms Gill says. "A financial planner will be dealing with a client's long-term goals and objectives. An adviser is in business to broker products."
The snag for most of us is that we can't afford the pounds 100-plus an hour it costs for this level of advice. If you can, it is worth it. Some solicitors and accountants also offer fee-based financial advice. But there are plenty of good alternatives.
One "hybrid" option is to go to a firm where you pay for the amount of time an adviser spends on your case. Only a few firms operate this system. One is Fiona Price & Partners. Managing director Fiona Price says: "People pay either by commission or fees and can be sure we are impartial." Time is charged at pounds 150 an hour and any extra cash generated by commission payments is then reinvested or used as a "time credit" against the next advice session.
Who pays ?
When you see a sales person or an IFA who is paid through commission, you do get free advice. The law demands that all advisers must identify your financial situation before advising on how to meet any gaps in your insurance and financial planning. This "fact finding" process is extremely time-consuming for them. For every one person who takes out a pension which may generate thousands of pounds in commission, a sales person or IFA may have several clients who generate no business
Most people who buy a product don't realise that they are subsidising other customers. Some canny investors even work the system by asking an IFA for detailed advice and then going to a discount broker (which will rebate commission to investors) to buy the recommended products.
Does commission corrupt?
A debate has gone on for years over whether it is misleading to describe people who earn their living from commission as "independent". Industry insiders suggest the battle was won years ago when IFAs had huge influence over local Tory parties. Government did not dare to anger such a powerful lobby.
But politics has changed, and there are now many fewer advisers. Those who remain have been forced to take benchmark exams, which has cleared out a lot of the dross. "The Financial Planning Certificate [FPC] exams are tough," says IFA Mark Howard, of Maddison Monetary Management. "There are about 50,000 advisers now; in the late 1980s there were 200,000. There are always some bad apples and people who have not re-educated themselves. I would not be surprised if they said the AFPC exam, which is degree-level standard, should become mandatory."
Cranking up the educational demands on IFAs would probably ensure better advice, but would it be totally unbiased?
Many IFAs protest that they do offer unbiased advice. Stephen Dight, of Grosvenor Financial Services in Oxfordshire, is usually paid by commission. He does not think clients who pay him a fee get a better deal: "I always say to clients, 'Do you think I know what I am talking about? Do you think I have your best interests at heart?' There has been too much suspension of common sense. You wouldn't buy a car from someone you don't trust, but financial services are being sold, not bought, and that is the problem."
Individual advisers may be unbiased. But this argument cannot hold weight across the whole industry. Consider investment trusts. These are barely sold by IFAs, yet there are many star performers and the investment is much cheaper than a unit trust, precisely because investment trusts do not pay commission to advisers.
Daniel Godfrey, director general of the Association of Investment Trust Companies, says: "It's true that investment trusts have been less recommended by IFAs than unit trusts; a lot of this is historical because they were not allowed by regulations to recommend unit trusts. I have no objection in principle to advisers being paid commission, but I believe they should be paid by way of an additional charge agreed between the adviser and the client."
This would mean that the investor paid a fee for the advice. That may be the way forward in the long term, but many people are reluctant to pay money upfront for financial advice.
Is it really independent ?
The familiar argument is that IFAs can survey the whole market and find you the best deal. However, some only use a "panel" of a few firms. They just don't have time to survey every provider, and many customers feel reassured if they are advised to buy a big name. Fair enough, but would you be happy to know that firms "enhanced" commission and special offers to advisers, in a bid to get them to shift more of their products?
This is unfair on customers and last week the Office of Fair Trading announced a review of "polarisation", which forces advisers to give either independent or single-company advice.
One idea is to allow a breed of "multi-ties". These advisers would make a living by openly working for a handful of firms.
Be an assertive consumer
Once you are aware of the part commission plays in the advice process, you can be a much more informed customer and play the system to your advantage. IFA Stephen Dight says he welcomes informed customers and offers flexibility on sharing commission payments: "Most of the big life companies now offer a 'commission menu' where
the adviser can decide how much to take and how much to rebate into the contract."
There is a huge amount of mystique surrounding financial services. However, there is accessible financial advice and performance data in the papers, on the internet and on the TV and radio. If you feel confident, you can buy investments direct from providers or discount brokers.
The problem with buying, say, a PEP direct from the provider is that you will still have to pay 3 per cent commission - it's built into the cost of the product whether or not you take advice. The exceptions to this are the new arrivals in the market, such as Virgin Direct, which don't pay commission. There are also some old-established companies that don't offer IFAs financial incentives to sell.
Some IFAs offer transparent commission-sharing arrangements for customers. But that is taking much-needed money out of their own pockets. Others, such as Mark Howard, are going on to the internet. His company has a website that allows customers to take advice, or to buy direct, and get most of the commission repaid.
In future, the structure of financial products will become much easier to understand - the Government's plans for individual savings accounts (ISAs) will see to that. But when the vast majority of advisers, whether tied or independent, are trapped by the need to generate commission, how much progress can we really expect ?
The Institute of Financial Planning, 0117 990 4434, has a free guide to members who offer fee-based advice, and a booklet on choosing a financial planner.
IFA Promotion gives you the names of three IFAs in your area. Call 0117 971 1177.
What you should ask an independent adviser
You don't have to ask all these questions. A good financial adviser should be someone you feel you can trust.
The adviser should give you a piece of paper outlining his or her terms of business when you first meet him. This will answer some of these questions, such as how the adviser is paid, and going through the paperwork will open up conversation and give you the chance to ask more detailed questions:
1. How are you paid?
2. Will you advise on products which don't pay you commission?
3. Will you share commission with me?
4. What exams have you passed?
5. How long have you been in business?
6. Can I talk to an existing client for a reference?
7. Will you contact me to review my finances in the future?
8. If you charge fees, can I have an estimate for the work involved in advising me ?
TEST them out
What qualifications does an adviser have?
You may be seen by someone who has very little in-depth knowledge. Sales people working for one firm and independent advisers who are new to the business have two years from joining a firm to pass the core exams. This is the Financial Planning Certificate (FPC) and it consists of three papers. The first two are multiple choice, the third is made up of written answers to case studies.
FPC 1 is alarmingly easy and concentrates heavily on financial regulation and insurance products. Yet newcomers who have only passed this one exam can see clients and give financial advice. (You may be slightly reassured to know that their paperwork is monitored and they are sometimes accompanied on visits by a senior colleague.)
Most advisers don't bother to take extra exams once they have the FPC. But there is an advanced financial planning certificate (AFPC) and members of the Institute of Financial Planning, who charge fees and call themselves financial planners, all have this qualification.
If you are looking for pensions advice, ask the adviser if he has passed the G60 pensions exam, which guarantees he will have a higher level of understanding of a complex subject.
Chartered accountants who offer financial planning have passed their own exam, the Initial Test of Competence.
Solicitors giving financial advice have the FPC exams as a minimum.
At the top end of the market, a few advisers are also Certified Financial Planners, a qualification marked to an internationally agreed standard.