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big ONE In a climate of constant warnings to independent financial advisers about industry changes and the need to adjust and tighten their belts particularly with stakeholder pensions’ slim margins, it is no surprise that many are wondering where the money is going to come from. Current IFA commission charges can vary from adviser to adviser and the IFA may use varied ways to obtain their remuneration. Charges can be time-based, transaction-based or a combination of both. Alternatively, the IFA could make their money by commission alone, provided that the customer acts on that advice. In such cases, IFAs use contracts that pay close to the industry standard commission. Lastly, they could have fees offset by commission, where the IFA charges fees, but also takes commission; their nominal fees are offset by the commission income. Commissions in the financial sector recently came to the fore in a report published by the Treasury, which looked into medium- and long-term retail savings. In the report, the review’s author, Ron Sadler asserts that remuneration structures are a major source of incentives for tied agents, direct sales forces and IFAs, as they would be in any market. He adds that, the fact providers tier commissions for different products and also different distribution channels makes matters more complicated because it makes it harder to see a clear relationship across products, between commissions paid and costs incurred by the channel. The report points out that although the regulatory regime relies heavily on disclosure about commissions in order to safeguard consumer interest, the complexities of commission structures and indirect benefits with which product providers can reward the distribution channel may call into question how effective this is. Sadler claims: “In practice, most consumers do not understand that they may end up paying the commission cost – through the front-end charge.” Importantly, he points out that when an IFA makes a sale with remuneration through commission, the effect is that advisers are rewarded for maximising sales volume rather than for providing the best advice for clients. Geoffrey Pointon, chief executive of Pointon York, claims this is an area of concern within the financial sector, and that will be addressed by the report. Roger Sanders, deputy chairman of the Association of Independent Financial Advisers and principal of Roger Sanders Associates, reflects on what has happened to IFA commissions: “In the past, IFAs could earn up to 65 per cent of the first year’s contributions on a pension as commission if the policy had more than 25 years to the retirement age. What we now have in the one per cent world is that those commissions have come tumbling down. In order to stay within the one per cent charging structure, we are looking at commissions of between 12.5 and 25 per cent of the first year’s premium.” The advent of stakeholder has meant that IFA business has suffered a blow on commissions. Targeted at lower income earners, some claim that it is not economical for IFAs to sell stakeholder because the one per cent cap allows very little margin for the product to be actively promoted by providers and IFAs other than through the workplace. Alasdair Buchanan, head of communications at Scottish Life, says that stakeholder may not necessarily work out to be cheaper, due to the way the charge for the financial advice is structured. He says: “If you pay for advice as a fee, it may be covered by the employer as part of their contribution to setting up the arrangement for either a stakeholder or a GPP. However, if the advice is being paid for on a commission basis, then the most cost effective way of doing it is a GPP. This is because the commission will be paid from personal pension contributions which get tax relief, either at basic rate or if the customer is a higher-rate taxpayer, they get 40 per cent relief on the cost of the commission.” The distinction, which may or may not apply depending on the way the particular arrangements are set up, generally favours the GPP product rather than stakeholder. Add to this the fact that if you pay a fee, you are paying more than your contribution to the scheme. “That really is the ultimate deterrent for many employers who said that they have earmarked a certain amount of funds for pensions and don’t want to pay over that amount,” says Sanders. In order to escape the restrictions brought about by the one per cent charge, experts suggest that IFAs need to adjust to the changing market. Sanders says: “The way forward for IFAs is to agree on the size or amount of remuneration and the method by which it will be taken. Then, and only then, would they go out to tender to various companies for quotations. What IFAs have got to do is work out what added value they are bringing to their clients, and match the service they are going to provide to the clients’ expectations.” Sanders believes that the bottom line is that the IFA has to work out what they need to earn to cover operating costs and minimum overhead costs which have been a challenge. After factoring in an element of profit, they then have an idea of how much they need to earn per hour in order to work out a charging structure for the installation charge for a pension scheme. Many view the internet and electronic communication as ways that IFAs can survive such slim charging structures, with pensions being sold online, and advancements in electronic signatures speeding up processes, making it a more efficient and paperless purchasing method. However, full reliance on electronic management is yet to occur, as not all systems are running as smoothly as anticipated. In some cases, where electronic management of administration has been implemented, employees have to manually unravel processes which have gone wrong. Sanders summarises: “The more control we have over the administration that currently lies with the product providers, the better it is going to be, provided that we can actually get the remuneration to do that. I see a future for internet aggregation services or product and fund aggregation services, and what’s happened so far is the tip of the iceberg as far as that is concerned."
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