Professional advice should never be sold short

Debate about the impact of commission raged when the FSA was working on the RDR.  But the alternative fee-based approach has now bedded in and, in many ways, is working well.  So I was taken aback to hear Tracey McDermott of the FCA suggesting on Money Box that the Financial Advice Market Review (FAMR) might bring back some elements of commission to pay for advice.  It seems bizarre that this should be considered by the architect of the reforms and only three years after commission was ended.

FAMR is concerned with the availability of advice.  But allowing commission can never be the answer to problems of access.  Commission does not reduce costs.  It just embeds costs in products, irrespective of whether the consumer has benefited from advice.  Nor does commission make advice more affordable.  It relies on creating the illusion that advice is free.  How can hiding the true costs of a service ever be in the consumer interest?

Commission also puts a conflict of interest at the heart of the client relationship.  The adviser is incentivised to sell products rather than offer more suitable advice.  Products which are recommended will be limited to those with commission attached.  This is not simply a problem of restricting the available product range. Commission produced a legacy of mis-selling across a broad range of financial services. The problems created by commission put generations of consumers off taking advice for life.  It was not only bad for consumers; it was also bad for the long-term future of advice.

Some commentators have suggested that allowing commission would be acceptable if the rate was fixed and only applied to ‘simple’ products.  But if commission isn’t right for most investors, why is it right for some others who may have less money to invest?

The market experience from banning commission has been positive.   Products are now competing on their merits with advisers incentivised to secure the best outcome for their clients.  Clients’ interests are placed at the centre of this relationship.  Investment company shares, which struggled to get attention from IFAs in the pre-RDR world due to the inability to pay commission, are increasingly being selected for client portfolios.

Arguably the fundamental challenge of the FAMR is to increase demand for high quality, independent advice from consumers who need it most.  This is a difficult challenge but one which would be made almost impossible if we return to commission and the problems and lack of trust which would inevitably follow.