Baxter Fensham Limited Financial Planners - Financial Planners, Wealth Managers, Tax Planners

A fee based approach to financial planning is imperative, because without it, the integrity and impartiality of any advice given simply can not be proven. It may be that a perfectly honest and decent person can provide independent advice on a commission basis but this is irrelevant if the client perceives that there is a potential problem because of issues such as commission bias. More importantly, it is the question of impartiality rather than independence that is more important. In other words where an adviser has two possible solutions to a clients problem, one which secures the sale of a product and one which does not. The question arises as to whether or not the second solution will ever be mentioned to the client.

An example of this my be an education cost planning strategy. The client wishes to ensure they can send their children to University and option 1 would be to pay £500 pm in to an ISA to build up capital to fund the costs when the children reach 18. It is a good solution and provides the client with the secure feeling that they have taken action to resolve the problem and the adviser is happy because they will make initial and trail commissions on the sale of the product. However a second solution may simply be to advise the client to pay the £500 pm off their mortgage so repaying the debt early by the time the children are age 18. The parents could then directly fund the education costs with the money that they were paying to the mortgage each month but no longer have to, due to it being paid off early. This solution would be of lower risk and maybe very attractive to many clients. However it is not attractive to a commission based adviser because he does not get paid commissions for advising clients to pay off debt. As such it is this impartiality of the advice given under a commission based proposal rather than the independence of the advice that we have concern with.

Perhaps the main issue with commission is people have been insulated from the true cost of financial advice for so long (because the life and investment companies and advisers all have an interest in deliberately hiding the real cost) it has been seen as “free”, and many people’s perception is that they simply won’t pay for advice in a fee form. As a long standing fee based practice, we know this simply to be untrue and when the true cost of commission based advice is explained to the client almost every single individual or company we have ever dealt with prefers the fee based route.

For example, a commission based adviser may advise clients to implement a protection contract to ensure that their mortgage of £200,000 is repaid in the event of either of them dying or suffering a critical illness over the 15 year term. The plan would cost the clients £240 per month and would generate approximately £5,279 in commission for the adviser. Furthermore the client is simply sold a product that resolves a single problem and yet the adviser is paid very handsomely for carrying out what in essence is an extremely simple task. Yet the true cost of the commission is far greater. Had the same contract been acquired on a nil commission basis, the cost difference would be almost £60 p/m. Over the 15 year life of the policy, the true cost difference would be £10,764. Effectively it could be viewed that the insurance company is adding the commission to the premium, then charging interest to the policy holder for paying the adviser the commission up front on the policy holders behalf and then treating it as an additional profit centre.

For less than half of the above cost difference, a financial planner would be able to construct an entire co-ordinated financial plan for life, providing clients with a clear picture of their entire financial position on all fronts including, savings, investments, retirement, protection and estate planning and how best to structure them in a co-ordinated manner, rather than simply buying a single contract to solve a single problem, (often creating bigger problems elsewhere).
Above all, the main concern with the commission payment structure is its impact on the biggest complaint clients have against the financial services industry, that of poor service. Due to the commission based remuneration structure, when clients talk to an adviser most think they are getting a service from a professional, when what they are actually buying is a product from a salesman. This unfortunately will always be the case with commission based advice, as one cannot provide an impartial service based proposition if each time you sit in front of a client you have to sell something in order to get paid.

A switch to a true fee based structure is imperative if people wish to provide or be provided with a genuine service rather than a sales experience. It is also likely to be far more cost effective over time.

Nick Crabbe CFP

Baxter Fensham Limited is authorised and regulated by the Financial Services Authority

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Tags: Fee based financial advice, fee based financial planning, fee based ifa, paying for financial advice