Goodbye commission, hello transparency!
Oval’s William Johnson looks forward to the end of commission and a new dawn for financial advice
Did you know?
22 firms scrutinised by the FSA in 2008 now face a £150 million compensation bill for giving poor financial advice to their clients1.
It’s the biggest structural change to financial advice in 50 years. The FSA will abolish commission in its current form from 1st January 2013. This is a seismic switch away from old-style commission paid by insurers and product providers on financial products sold. It’s also a huge change for advisers, product providers and ultimately clients who have been used to ‘free’ advice for so long. It represents a wholesale shift towards transparency, clarity and the paying of a fair price for services purchased.
This is the conclusion of the Retail Distribution Review (RDR) that the FSA has carried out over the past 2 years. Not only does commission go but advisers will need to have a minimum standard of technical competence that’s measured by examination. Simply put, it will now be the market - clients - who decide how much the services of our advisory community are worth, not the product providers. The challenge is, are advisory services up to scratch?
Responding to change
At Oval, we’re committed to a model that clearly defines the service that we provide to our clients - in agreement with them - and lays out the precise cost of providing those services. It is then down to our clients to make the informed judgement about the value they perceive from these services in the same way we buy and sell things in our everyday lives. We still see scope for ‘commission’ in the sense that IFA fees can be taken from an investment vehicle such as pensions or bonds, it just needs to be on a transparent and clear basis. Equally, an explicit fee can also be paid which - when a financial product is being purchased at the same time - should result in a decrease in the cost of that product. Overall there is likely to be little reduction in the overall cost of the advice/product mix.
It’s pretty clear there will be winners and losers on the advisory side – you can’t make an omelette without breaking some eggs – but we fully expect the inevitable shakedown to be one that lifts the quality of advice across our entire industry. That can only be a good thing, particularly when economic circumstance currently dictates a level of advisory expertise and care in decision-making by clients that hasn’t been seen for decades. While individual and business clients will see advice come with a price tag, they will know that the advice is geared towards a given product because it is right for them and not because of its behind-the-scenes commission structure.
We’re embracing the new wave
The removal of commission is a once in a generation opportunity to explore properly the value on both sides of the client/adviser relationship. At Oval we are confident that our service offering both in the corporate and personal investment world stands up to scrutiny. In many instances we’re already operating under the FSA’s directive and the extra clarity and trust it brings to our business relationships can only be a good thing. There’s no reason why that shouldn’t be exactly the same for other advisers who can cut the mustard: we’re ready for the challenge and look forward to a world where our remuneration joins the 21st century, is transparent and is based on the value we add.
1 BBC.co.uk, FSA Review 2008 – 9 April 2010
Like to find out more about how Oval can ensure RDR works for you?
Contact William Johnson on 0115 937 1325 or email at: william.johnson@theovalgroup.com.