Looking through the large pile of papers that she brought to the meeting I could see that the existing financial adviser had made some investment recommendations way back in 2001. The advice at the time seemed reasonably comprehensive, if somewhat predictable. In short a portfolio of unit trusts was established alongside a with profits bond held in a trust. In total a sum of around £250,000 was invested. The client was adamant that this was work done on a fee basis, however, the fee mirrors the levels of commission normally available from these products. Significantly, included in the structure was a trail commission of 0.5% payable each year to the IFA. On a nominal £250,000 portfolio this equates to £1,250 paid every year since 2001.

So looking through the papers accumulated since 2001, comprising mainly annual valuations and newsletters, I was keen to understand what level of service had been provided for this annual payment of £1,250. I can see no evidence of any advice or fund switches to cater for a changing economic climate, nor any attempt to re-evaluate risk tolerance. Despite the client calling to the adviser on several occasions over the years suggesting a further meeting, there has been no contact apart from a computer generated valuations and an accompanying newsletter about world markets.

So what exactly does this £1,250 per annum actually do for the client? Well, it has reduced the value of the fund by around £10,000 because of higher annual management charges to pay the trail commission. Apart from that I can see very little; annual valuations, but at £1,250 each this is a bit steep isn’t it?

The sad thing is that this practice is repeated over and over as advisers build a business built of recurring trail commissions, but instead of delivering a service they simply retain the money and then find new clients to build an even bigger pile of money from which to derive a passive income. Many advisers I talk to see the trail commission as a reward for selling the unit trust in the first place, and not as a reward for service.

I have said it before and I will keep on saying it, commission should be banned. The Financial Sservices Authority agrees with that statement but have so far shied away from a complete ban. I know that there are many advisers who do deliver a service for the money they receive, and in my opinion they could easily demosntrate their value and move to a pure fee basis, that way we could show up the others for what they really are: parasites.

So I’m in a bit of a quandry here, what should I do? In the end I put the ball back in the client’s court. It’s a lot of informatio to absorb and in my experience many clients do not fully understand how we are paid, or what the differences are between various ways of charging fees. Expressing remuneration as a percentage of assets under management also doesn’t help, 0.5% doesn’t sound like a lot, whereas £1,250 (in this case) does.  I suggested they go and talk to their existing IFA and determine exactly what commissions he had received since 2001, and what level of service he proposed to deliver for the money being received.

It is likely however that the trust between client and adviser has been eroded to the point the relationship no longer exists in the client’s mind. If the client decides to engage us instead, then I think we owe a duty of crae to the client to write to the IFA for justification of the commissions received so far, and to ask for a rebate. I doubt we will be successful, but we do need to chip away at advisers who think they can continue to get paid commission year in and year out without having to deliver a service.

And if all the firms that pass themselves off as independent financial advisers are actually offering their clients the option of paying a fee, then why is full commission still the default option on the illustrations offered by providers?

The difference in policy premiums between an insurance quote issued without commission compared to a quote with commission can be significant, on some illustrations we recently looked at premiums had been hiked by more than 30% to pay the commission. Yet whilst that’s a lot of money, it isn’t what I’m talking about today.

The issue is this; because commission is so embedded into the way products are sold it is the default option for many product providers, and it creates so much extra work for firms like us, who work entirely on a fee basis.

Whether it is the initial request for an illustration, or the physical processing of an application on which we have asked for nil commission terms, I am surprised at how often the instruction is ignored. This causes more work because we then need to ask for replacement illustrations without commission, or in some cases we have to return policy documents which have been issued on the basis that commission will be paid – we don’t want it!

We have an agreement with our clients to work on a time/cost basis, so surely the client should not have to pay more for the time spent correcting product provider errors. Certainly we would not feel justified passing on these costs to the client, but it’s the devil’s own job trying to get any compensation out of providers.  

So when can we expect this move to fees to actually filter into the world of the product provider?  If an adviser wants commission from selling a policy I am sure they will ask for it.

Why? Well earlier this year we asked Clerical Medical to stop paying trail commission on our clients policies and pension plans. Because of our 100% fee only model, commission, whether paid at the outset or ongoing, was no longer part of our charging regime. We can stop trail commission said Clerical Medical. So to clarify things we asked exactly how our clients charges would reduce. Our thinking was; if part of the annual management charge is simply paid to us, then surely if we no longer received it their would be a corresponding reduction in the level of charges. 

Er, no! Clerical Medical were going to keep it.

A conundrum, what should we do? In the end we found the clients a cheaper product, one paying no commission, and we arranged to switch the contracts free of charge. What a waste of time and effort, and a display of greed from Clerical Medical – an accusation from other advisers following this current action.

Returning to the article; I am dismayed by some of the comments from advisers hitting out at Clerical Medical. One adviser, who shall remain nameless said the following  “The client they have removed my trail from has not done business with me for years but if they asked for advice on financial planning, I would provide it. Will Clerical do that? Will they offer fair, unbiased advice on their with-profits fund, for example, if the situation comes about?”

Morally what right does this adviser have to continue taking money from someone who no longer appears to have a relationship for advice? And why are clients still in the Clerical Medical With Profits Fund? They’ve been taking the trail commission yet not giving advice on a defunct fund. Ignoring a fund that has returned virtually nothing throughout the raging bull markets post 2003 is an admission of abject failure. And that’s what’s wrong with commission!

In the same week as we introduce a new fee structure that relates solely to our advice and service proposition, I am starting a discussion on my personal blog around the whole subject of fees and commission. If you want to read it please go to  my own blog Random Thoughts from a Financial Planner.

For as long as I can remember, financial advice has been paid for by commission, and that’s still the case today. So it is understandable that there can be a mental block when someone asks you to pay a fee for the advice.

People who come to us for advice like the idea that advice stands alone, real independence you might say. But for some; paying for advice without commission might be a leap of faith too far. Perhaps it would help if we used an analogy to explain our thinking? I turn to the world of golf to help me make my point:

It’s relatively easy to get started in golf and there’s an endless supply of self professed experts to tell you where you’re going wrong. But eventually you reach a plateau. Unable to improve your game any further you figure it’s time to spend some money.

You haven’t got unlimited time and money to throw at the problem so you narrow it down to a couple of options. The Golf Pro working in the shop will analyse your swing and give you some tips before recommending a new set of clubs, he won’t charge you anything which is good because the clubs are expensive enough right? The other option is to spend some time and money on having some individual tuition and lessons, but if you do that you still have to play with your existing clubs, you cannot afford the two.

In the end you decide that new clubs will give you the edge, and the few pointers that the pro gives you will be enough to improve your handicap once more. And so it goes on, each time you reach a plateau you buy newer and better equipment and get a couple of tips to improve your game.

But what if you had chosen the other option? You meet the Pro, the one who isn’t on a commission from the shop, and you sign up for some lessons. After watching you take a few swings with your old clubs the pro picks up a club and steps up to the tee. You watch in awe as ball after ball flies straight and true. It’s clearly not the equipment that’s the problem.

Having seen what’s possible you listen carefully as your coach deconstructs your swing and slowly shows you how to swing properly. Old habits linger and it takes practice, but eventually it begins to fall into place. You begin to understand why when you do x, y happens. Your game is better.

And in a similar way that’s what we do, after analysing your current financial position we coach and educate you toward the life you want – your ultimate game perhaps. We’re not here to sell you a set of new clubs; we’re here to help you build a game plan.

Paying upfront for financial advice removes bias but is commission always bad?

Although Mr Hall prefers fee-based advice, he points out that the advantages of payment through commission do extend beyond perception. For instance, fees can incur VAT, unlike commission, which may also attract tax relief if paid on contributions to certain products, such as venture capital trusts and pensions. This may make it sensible for fee-charging advisers to offset part or all of their charges against the commission that they earn on any products their clients buy as a result of their advice.