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August 04, 2002 at 08:00 PM
London Editor
London
The commission system for long-term savings in the United Kingdom creates the potential for advisor bias and, as a result, independent financial advisors (known in America as brokers) need to become genuinely independent, through changes in the system of remuneration, says a report of the U.K. long-term retail savings market.
Research conducted by the U.K. regulator, the Financial Services Authority, “found statistically significant evidence of advisors recommending one providers offering over another because it paid a higher commission,” according to the “Sandler Review,” an analysis of the U.K. retail savings market, under the direction of Ron Sandler, the former chief executive of Lloyds of London.
To prevent the inherent conflict of interest, make it more difficult for commission bias to exist and create stronger commercial incentives for IFAs to become genuinely independent, the review suggests that remuneration should be “the subject of negotiation purely between the advisor and the consumer with no provider involvement.”
“I am keen to see advisors rewards, even if not paid in the form of an upfront fee, being negotiated between the advisor and his client, rather than determined by negotiation between advisor and provider, from which so many perverse incentives flow,” says Sandler in the forward to his report.
“This method of payment would enable the development of a properly functioning market in advice,” the report continues. “Consumers would be much more aware that they were purchasing advice, distinct from the product, at a cost.”
The report suggests that the payment could take a number of forms:
- A conventional hourly or fixed fee, which would be paid regardless of whether a sale was completed;
- Contingent on a sale, as commission is currently;
- Installments;
- Expressed as a percentage of the value of the assets under management.
“At the start of a relationship, and periodically thereafter, the advisor would present the consumer with a tariff sheet setting out his charges,” the report says.
The review recommends that the independence of an advisor should be compatible with a sales-contingent fee.
“Making payment for advice contingent on a sale of some sort tends to bias the advisor against recommending that the consumer do nothing, even if that is the best advice,” the review notes.
The definition of an “independent advisor” should be that he or she is an advisor who is not paid by a provider, the report says, adding that the use of the word “advisor” should be restricted to those who meet this criterion for independence.
“While advisor covers a wide range of relationships, it principally carries the connotation of acting solely in the interest of the client,” the review affirms. “A term such as financial product distributor more accurately describes an advisor whose remuneration arrangements are decided with product providers. Restricting the use of advisor in this way would enhance the value of independent status.”
