Much has been made of the opacity of costs and charges in financial services. Less has been made about the reluctance of customers to pay up front for the services they commission. This article explores the dip in confidence in financial advice and argues that both advisers and their customers are currently in “cold turkey”.
People buy people, but the cost to you of the person who provides you with financial services has been bundled into the price of the product he or she sells you.
It is of course possible to pay for a service through the product in any business. Pay an extra 20% on the price of the tiles you put on your roof and the tyler will throw his labour in for free. I don’t see many tylers charging on that i, why should they? After all, it’s easy enough to see if he’s done a “proper job” and if he hasn’t, he won’t get paid till he does.
Not so easy to see if a good job’s been done by your financial adviser though. It takes years to find out whether the financial plan you embarked upon was right for you. For most people, the process of organising their or their workforce’s long-term financial plans is so boring and the solutions so difficult, that the simplicity surrounding a small extra charge to pay for the advice comes as a blessed relief.
The advice is not free but, when expressed as a % of a small initial contribution, it is generally palatable. For advisers, commissions have always been a way to charge with confidence.
However, charges expressed as a percentage of a fund are anything but simple – if the fund does not grow as expected. Active Member Discounts, Early Redemption Penalties, Capital Units and Non-Allocation Periods are all financial services terms used to describe the way long-term income streams can be protected.
Providers could offer these structure with confidence and advisers could benefit from them, in the sure knowledge that their income streams were protected.
The great regulatory error was to assume that advisers and providers would continue to provide the anticipated levels of governance over the products sold with these protected commission structures. This view expressed a confidence in human nature that could only be described as naive.The great error among advisors and providers was to suppose that the system of protected commissions was sustainable. It wasn’t and it ended at the beginning of 2013 with the implementation of the Retail Distribution Review and the subsequent ban on consultancy charging which extends the use of commissions to workplace pensions.
But take the sugars from the cup of tea and those used to a couple of spoonfuls find it hard to adjust. Recent surveys of consumer confidence in financial advice show a sharp drop in satisfaction this year. It’s hard to be sure why but it may be that the public are in “cold turkey”.
Many advisers have abandoned their practices rather than wean their customers off commission while those who remain have to face invidious questions about why the obviously more transparent “fee” approach hadn’t been adopted earlier.
The truthful answer is that most people were as happy to buy with commission as the providers were to use it to reward distribution and the advisers were to be rewarded. To talk of systemic failure is to give this blue funk too grand a title, the system of commissions that became all pervasive simply pandered to the laziest aspects of human nature. Given half a chance, human as we are, we will return to the commission system where distribution costs are bundled into the product’s price and protected by the small print of contracts.
I see evidence of commission recidivism whenever I open the financial press. It is like a packet of fags waved in front of an ex-smoker and I hate it!
The only way that we can properly charge for our services, whether financial advisers or plumbers or tylers or bankers is by being clear about how we are paid, by separating the cost of labour from the price of the product. This true and fair approach to pricing is something that I am championing on http://www.pensionplaypen.com.
There are no short-cuts when the price is transparent, I cannot charge my customers even small amounts unless the customer is happy to pay. Confidence in selling has to be reciprocated by confidence in buying. Inevitably my venture will be caught by the “cold turkey” effect as customers adjust to the new world and wean themselves off the easy option of commissions.
But once we are out the other side we can venture into the sunny uplands of fair and true pricing. Customers can purchase and repurchase with confidence and those who sell the financial services on which we depend , will be able to do so with a sense of pride born out of the confidence that a proper price has been charged for the job.