Is it right to ban financial advisers from taking commission?
By Tony Bonsignore 26 March 2010
The Financial Services Authority today finally banned financial advisers from taking commission on investment products such as ISAs, pensions, life insurance and the like
The move has been on the cards for a couple of years, and follows a major regulatory review of the sector. But still it is likely to come as a shock to those old-school advisers who pick up a tasty commission for every product they flog.
Certain voices within the advice industry have long argued that forcing consumers to pay upfront will deter them from seeking financial advice together. Others, meanwhile, argue that the FSA has no business intervening in the market in this way.
Other observers, though, note the way ‘independent’ advisers are swayed in their recommendations by the amount of commission they earn, both in the products they pick and the providers they choose.
They also remember a wave of outrageous mis-selling scandals within the sector, from personal pensions to endowments in the 80s and 90s to precipice bonds and split capital investment trusts in the noughties.
Commission-based advisers cannot but help but be biased, they say, and for that reason they should be banned.
The regulator obviously agrees.
From the end of 2012, firms will have to be upfront about how much they charge for their services, and no longer hide the cost of their advice behind the cost of a product, an FSA statement said
‘In addition, firms will not be able to accept commission in return for recommending specific products. Consumers will know what they are buying upfront, how much it will cost them and also have the peace of mind that it was recommended to suit their needs.‘
Firms offering independent advice will now have to demonstrate their recommendations are based on ‘a comprehensive and unbiased analysis of the market and that any product selection is made in their clients’ best interests,’ it added.
As for those who are unable or unwilling to pay for financial advice, the cost of the advice can be bundled with the product; however it must be clear exactly how much is being charged for advice.
‘It is vital that consumers know not only the cost of financial advice, but also its value,’ Sheila Nicoll of the FSA says.
‘There is a need to reconnect the adviser and client, where one pays for the services of another, and without the distraction of commission. Only then can consumers have real confidence and trust in the advice they are receiving.’
So what do you think, then, has the FSA made the right decision? Will it boost demand for financial advice or reduce it? Does commission have any place in modern retail financial services? And will it stop the next mis-selling scandal?
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