I once described commission as the cancer at the heart of the
financial services industry. In fact more than once. Many, many times. It took
years before the regulator took any notice. Not so much of me, but of the
growing evidence that commission caused bias in investment recommendations to
the detriment of consumers.
From 31 December 2012 commission was banned on all new sales of
investment and pension products. So I was shocked this week to read new figures
from the Financial Conduct Authority which showed that in 2016 retail
investment advice firms still earned £843m a year from commission. A lot of
this money is from ‘trail commission’ which was earned on sales before the 2012
ban. Trail commission was typically 0.5% of the money that had been invested and
was paid to the adviser for as long as the investment was kept. Nominally it
was paid by the investment firm. But of course ultimately it came from the
customer’s investments.
More than half of all investment advice firms now like to impose a
percentage charge on their clients directly – I call it a tax, they call it an
ongoing fee for services provided – typically of 0.5% or 1% of the wealth of
their clients. Altogether 57% of advice firms use this wealth tax as their sole
way of charging and another 10% use it as part of their charges. Only 16%
charge an hourly rate and another 16% charge a fixed fee.
More than eight out of ten advisers hide the payments from their
clients by using what are called ‘facilitated payments’. That means the adviser
does not send a specific bill which the customer pays. Instead the fee is taken
from the investment. In other words it is ‘facilitated’ by the firm where the
investments are kept.
Although the client has to be told what the fee is there is no
direct connection between the charge and its payment which disappears from the
investment and is passed direct to the adviser. No wonder advisers tell me that
customers do not care about the price. If they saw a bill and had to pay it directly
they might care a bit more.
Firms are successfully replacing the income they used to get from commission.
Total revenues of the 4970 firms which give investment advice have grown
strongly since it was banned on new sales. But commission still
represents a quarter of their income. Some of it is commission on products the
client buys without advice and there is some evidence in the figures that firms
are earning more from these non-regulated activities but the data is inconclusive.
Commission was not banned in mortgage or insurance sales. The new FCA
data reveals that around 80% of the income of from mortgage and insurance sales
comes from commission. Insurance – often sold on a restricted basis even by
independent financial advisers – is the big money-spinner. In 2016 firms made a
total of £15.1bn from selling insurance compared with £3.7bn from investment
advice. Mortgage sales came in a poor third at £1bn.
The figures the FCA published this week were based on returns made
by all the firms which sell us regulated financial products – investments
(including pensions), mortgages, and insurance. download the Data Bulletin and the tables that underpin its graphs.
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26 May 2017.
