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Banning embedded commissions: The UK sees uptick in number of advisors

By Susan Yellin | November 18 2013 07:05PM

“The reports of my death are greatly exaggerated.”

Mark Twain’s tongue-in-cheek remark about the 1897 newspaper article mourning his demise may well be equated to what has come about for financial advisors in the United Kingdom after regulators there banned most advisor commissions, including trailers.On Jan. 1, 2013, the UK regulator brought in Retail Distribution Review (RDR), aimed at ending commissions and replacing them with an up-front, fee-for-service model. At the same time, it raised the bar on minimum qualifications for advisors and set up “independent” and “restricted” advisors, outlining the kinds of products and services these advisors can or cannot sell.

There had been great fear that RDR would push away a good chunk of the robust advisory network in the UK. But in July, the Financial Conduct Authority released a report stating there was actually a six per cent rise in the number of advisors, a result, it believes, of advisors re-entering the market.

“There are a lot of scare stories coming from across the pond,” said Phil Billingham, CFP and a member of the board of directors of the Institute of Financial Planning in London. “The vast majority of advisors left not because of the fee problem but because of the qualification problem. The ones who left are older and didn’t want to write more exams at this stage of their lives.”

The FCA said six months after introducing RDR, 97 per cent of advisers had attained the appropriate level of qualification, with the final three per cent being recent entrants who are still studying within the timelines allowed by the rules.

But whether investors like the idea of paying by fee only is still not clear, said Mike Gould, senior advisor, retail distribution with the Investment Management Association, which represents UK investment management industry members.

In an interview, Gould said the average charge for advice hovers around £160 pounds (C$260) an hour. “There is a lot of concern that some people who had received advice in the past will be reluctant to pay [now]. So there are certainly concerns that some people may be excluded from advisor advice and concerns about what they will do instead.”

It was this anxiety, especially over smaller investors, that was voiced at the June roundtable held by the Ontario Securities Commission into Canada’s mutual fund fee structure.

One of those was Greg Pollock, president and CEO of Advocis, the Financial Advisors Association of Canada, who said that doing away with the current embedded fee model would most affect those with only modest amounts to invest and the least ability to pay.

“The average Canadian invests $2,500 to $2,800 a year into all investments, including mutual funds. For advisors who will start charging separately for the services they already provide in exchange for trailer fees…financial advice would become unaffordable, and therefore inaccessible, to the average Canadian.”

He supported giving consumers a choice of how to pay to ensure a competitive marketplace, rather than following other jurisdictions that have banned third-party commissions.

However, Marian Passmore, associate director of The Canadian Foundation for Advancement of Investor Rights, said it only makes sense to ban a business model that benefits the fund manufacturer over the investor.

“The vast majority of advisors left not because of the fee problem but because of the qualification problem. The ones who left are older and didn’t want to write more exams at this stage of their lives.”

– Phil Billingham



“Only banning conflicted remuneration, including trailer commissions, will reduce the bias and misalignment incentives currently affecting the client-advisor relationship and this will lead to better outcomes for consumers,” Passmore said. “That is the choice that should be made.“

As of July 1, Australia joined banning commissions and actually went further, said Martin Codina, director of policy and international markets with the Financial Services Council, the organization that represents investment fund managers and users of financial advice in Australia.

The legislation that brought in the ban also did away with “conflicted remuneration,” a broadly defined term that includes monetary or non-monetary payment, Codina said in an interview.

Industry transformed

“The industry, in terms of payment, has been transformed,” he said. “There are now very few payments permissible between a product provider and a distributor and an advisor.”

There has been some grandfathering of commissions for business conducted prior to July 1. But even then, there is nothing stopping the client from saying he wants to renegotiate the agreement or take his business to a new advisor.

Only one in five Australians receives financial advice, probably stemming from the country’s Superannuation Guarantee, a compulsory retirement contribution made by employers and which is now up to 9.25 per cent of employee salaries. There are exceptions, but generally, employees end up in the super fund of the company where they work.

Super funds can offer low-cost advice to clients – but the advice must be generic, such as what the fund invests in, said Dante De Gori, general manager policy and conduct with the Financial Planning Association of Australia (FPAA) Ltd., the main financial planners’ organization in Australia.

While financial planning is a holistic profession, interested investors can receive single pieces of advice and this is generally seen as the more efficient and cost-effective approach, De Gori said in an interview.

The problem is that many clients erroneously believe they didn’t pay anything before the ban went into effect and are willing to pay only in the neighbourhood of $300 for advice, with the result that middle- and low-income employees may find paying an advisor a struggle, he said. High net-worth investors have always been willing to pay for good advice and some advisors are now targeting only that market, he said. Many investors wait until they are well into their 50s before talking to an advisor.

An inquiry was held on the issue of advisor compensation in 2009 and it was at that time that the FPAA decided that irrespective of what the inquiry came out with it, it would ban its members from commissions.

“At that time, it was not welcomed [by advisors]. It was a tough period for them,” De Gori said in an interview. The FPAA took the reins and provided the right tools and support to members, including seminars and ongoing discussions,

FPAA members realized it might take a couple of years from the time they held their first conversation with clients to a full, fee-for-service model – but they could make it work.

Advice-only model

In the end, members transitioned over to an advice-only model a year before others, leaving those who did not scrambling to catch up, said De Gori.

Many advisors who had struggled at first with the fee-for-service, now see the new regulations as a way for them to concentrate more on the client’s best interests, said De Gori. Previously, he said, advisors might not get paid if they told a client to pay down debt instead of buying a product because advisors would only get paid if they sold a product.

Codina said the mutual fund industry’s biggest problem in Australia was that it tried to walk both sides of the issue.

“The industry tried to say: go and see an independent financial advisor, advice is important…and then at the same time, the industry pays those same advisors and the advisors live off the commissions they receive from the product providers. That taints the perception in the community that they are professionals rather than salespeople.

“Eventually they have to make a choice: are they going to be salespeople or are they going to be professionals?”

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