Are the days of fat fees and hefty commissions coming to an end?
Commission-based selling of financial products and advice is now banned in the UK – will Ireland follow suit?
It’s a sales approach that has endured, despite concerns about an obvious conflict of interest. To meet the cost of providing financial advice to consumers, financial advisors or brokers are paid commission from banks, insurance companies and investment managers when they sell their products.
Now however, change is afoot. In January of this year, the UK moved to ban the practice of paying for financial advice via commission, by introducing the Retail Distribution Review (RDR) regime. This effectively bans commission paid by investment and insurance providers to distributors, such as brokers and financial advisors, on the sale of investment products (protection products, such as term life assurance, are currently outside the remit of the review).
Instead, advisors now have to make their money by charging an up-front fee for advice, or taking their fee from a customer’s investment.
But what have the consequences of the new regime been? And should Ireland learn from the experience of the UK and take a similar approach?
The goal of the UK’s approach is to remove the conflicts of interest that exist when advisors are paid to sell certain products. Firstly, there is an obvious incentive for advisors to sell certain products if they offer a greater commission than others; and secondly, there is a “trading bias”, whereby advisors only make money if they sell a product, so are therefore more inclined to recommend you buy a product – even if you don’t really need one.
The UK authorities also hope the new regime will cut down on mis-selling. In 2009 the Financial Services Authority said that commission-based selling was at the “root” of such scandals over the years.
So are UK consumers willing to pay for advice?
“It’s hard to tell at this stage. Until we see the full-year comparisons of the amount of business being done, it’s hard to get an appreciation of the full impact of RDR,” says Chris Hannant, director general at the UK representative body, the Association of Professional Financial Advisors (APFA), although he notes that “it was certainly the case that business was slowish for the first couple of months of the year”.
After all advice is not cheap – research by UK website unbiased.co.uk shows that the average cost of an initial meeting and financial review is around £500, while investing £50,000 will cost around £1,500.
In the UK, advisors can now charge clients in one of two ways: through a set fee; or by taking a cut of the investment. This can still make it difficult for investors to work out just how much the advisor is charging them – after all a £500 fee, or a 0.5 per cent deduction from monthly contributions, won’t be instantly comparable.
In Ireland, you can expect to pay between €80-€200 an hour for financial advice, or a fixed fee of between €1,000 and €3,000.
Fee-based financial advisor David Quinn, of Investwise, says he hasn’t had any problems getting paid directly and that there is a growing demand for fee-only advice.