Offering IFAs the prospect of commission is akin to running a meeting of alcoholics anonymous in a pub.
Yes, Tracey McDermott has ruled herself out of being the long term boss at the FCA and no I don’t think that the argument is closed but even the prospect of solving the problems with delivering sensible financial solutions to the mass market of British Citizens by reintroducing commission is awkward.
It is as awkward as scrapping the investigation of Banking Culture, something that the FCA did just before Christmas. I suspect that re-introducing commission and inviting Banks back into the FCA’s good books are symptoms of the same malaise.
We should not underestimate the RDR and just what a dramatic change it has had on the way financial services are sold in the UK. The Financial Advice Market Review has been set up to survey the new advisory landscape. It seems to be concluding that life was better before January 2013 and the solution is to roll back the years- to put a drink in the alcoholics hand.
But the cold turkey that the financial advisory industry has been going through has been painful and constructive. We are only three years in but already we are seeing genuine advances in the delivery mechanisms for new products. Robo-advice would not happen if advisers were able to be paid for turning up and completing forms. Workplace pensions would not have been delivered at 0.75% or less (nor will they) if commission is readmitted.
And the reintroduction of commission will nip in the bud the new collective solutions that could have introduced a default means to invest our retirement savings and spend them without recourse to advice.
My partner will tell you how I sat at home two nights ago , shaking my head and almost in tears. I had been at a meeting with the CEO of an advisory business active in helping clients take informed decisions on workplace pensions.
His firm has been firm supporters of doing it the right way and has used our Pension PlayPen service consistently. Then the stream of business stopped.
What has happened was that the advisers had found a way of getting paid via a workplace pension provider and – by carefully crafted agreement wordings were now taking adviser fees instead of member borne charges. It turns out that the provider’s default fund is hardly ever fit for purpose and that advice – paid for by members – is critical.
Now this provider is being recommended almost exclusively by this provider and of course the adviser fees are rolling in (as if they were commission).
The members are now in “member specific investment strategies” and of course there will be a need for annual reviews of those strategies, at the member’s expense.
I am sure that all parties believe that overall value is being added by these reviews and that the adviser charges will be more than compensated by improved performance. But I am not a party to this way of thinking.
I sat and shook my head and was pretty inconsolable. I felt like going down the Cockpit and drinking myself senseless.
Of course I woke up yesterday morning and decided to move on. I cannot control what the FCA decide to do with FAMR. They may open the floodgates and allow commission to flow , as the rivers flowed through Hebden Bridge, Leeds and York.
The Banks and other commission junkies , may be allowed back in the pubs and crack-houses and the deleterious effect on people’s attitude to advice will be immediate. All that has been done – at such cost – can be unwound with a stroke of the keyboard.
Thomas Phillipon, the French economist, has established that every time the financial services industry looks to have made a tiny step to disintermediation and genuinely lower costs of owning financial products, that step is retraced. In 125 years , his analysis shows we have consistently paid around 2% pa of the value of our investments to third parties- to manage them. In a low growth environment, we might as well put our money under the bed (though I sense that the banks would charge us bed insurance!).
It looks like he is being proved right again. Nature abhors a vacuum and financial services cannot abide charges under 1%. If the market can tolerate a 2% pa intermediary charge, then we will have 2% products, despite the cost of the product wiping out any nominal (let alone real) growth.
There is no sense at all in introducing commission. The desire to do so, is what underpins the financial empowerment mantra which assumes that because people have been told to do the right thing, they will do the right thing. The reality is that you can tell people to watch out for sharks but they will still go swimming, you can tell an alcoholic not to go to the bar, but if you invite him to the pub, he will drink.
The long-term answer to the problems the FAMR is trying to address rest in there being good products into which people’s money is invested that do not rely on financial advisers managing them. The long-term answer is to take intermediaries out of the mass market, where they do little good and a lot of harm and replace them with sound default products and collective education on what makes for good.
That is what FAMR should concentrate on, not the regression to commission.