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Last Updated: Friday, 13 May 2005, 12:57 GMT 13:57 UK
Have your say: The Sins of Commission
We asked for your views following our programme The Sins of Commission. Below is a selection of your comments.

The comments we publish are not necessarily the views of the BBC but will reflect the balance of views we have received. Readers should form their own views on whether messages published represent undeclared interests, or views prompted by a common source.


This debate has now closed.

There seems to be a basic misunderstanding in a lot of the comments so far, in thinking that somehow fees will be too expensive and therefore commissions are OK.

Where do people think the money to pay the commission comes from? It comes from your investments of course.

How would you feel going to your local GP knowing that the only money he made comes from the drug companies whose products he prescribes?
Simon Hallett
Would you rather pay money upfront for a professional service, as you would a doctor or solicitor, or would you have someone swipe it from your investment's anyway? Because that is what happens.

Full fee and commission transparency is great, but when a recommendation is made, with the commission disclosed, how is the client to know whether a similar investment is available, an investment trust for example, where the fees are lower and there is no commission payable?

A lot of analogies have been used by various contributors, and here is mine: How would you feel going to your local GP knowing that the only money he made comes from the drug companies whose products he prescribes?
Simon Hallett (former industry and consumer)

Whilst no-one begrudges an advisor a fee for their work, these always seem excessive however paid.

Most of us have fairly simple pension requirements, but getting these sorted out by an IFA seems excessively complex.

If I consult a builder to build a wall, I don't expect him to go away and research types of bricks or mortar mixes
Jonathan Reason
We are told this is because these products have to be researched.

Yet if I consult a builder to build a wall, I don't expect him to go away and research types of bricks or mortar mixes.

Because he is at the coal-face of his occupation one expects him to have this knowledge to hand.

Pension providers set aside a certain sum for investor's advisors. If you self-invest, they refuse to pay that back to the investor, and that seems wrong.

And should Independent Financial Advisors be allowed to continue as such? Independent they may be, but few are impartial.
Jonathan Reason (consumer), Exeter

The task of educating the public to accept fees as opposed to commission is tough, but worthwhile.

We as an industry have to justify that fee in terms of performance and service, and that can only be good for the client.
Ian Head (Industry), Maidenhead

Financial advisers will be good, bad or indifferent regardless of how they are remunerated.

Both fees and commissions can be the best thing for the consumer based on their circumstances
Ian Smith (Industry), Solihull
Both fees and commissions can be the best thing for the consumer based on their circumstances.

Finding a good adviser giving bespoke advice and allowing you to pay most cost-effectively is obviously best.

I must also point out that trail commission on most investments is not an add-on cost but implicit in the fund managers cost.

Typically a manager charges 1.5% and gives 0.5% to the adviser who services the client but go direct or sack the adviser does the charge go down? Oh no, the fund manager keeps it!

So find a good IFA who will give you real service for that money rather than get nothing for it.
Ian Smith (Industry), Solihull

I bought a Nationwide fund through an ISA directly from the building society at one of their branches for 4,000.

I was taken aback by a letter disclosing a commission fee paid from Nationwide Building Society to Nationwide Unit Trust Managers.

Well, being a building society I thought I was buying directly from the provider, and did not need advice, I just wanted to buy the product and had made up my mind already.

Although I understand the charges I have to pay for managing the fund (around 1.5% yearly) and the commission is not charged directly to me, I feel the payment of charges by fund firms may affect their performance over time.

My question to the industry is: Can customers buy financial products directly from the providers? Why don't they offer better deals to customers when commission is not paid?
Juan Cano (Consumer), London

When my husband died last year, the insurance company refused to pay out because they said he had not disclosed that he had been for hospital tests for undiagnosed fevers.

In fact the insurance company's tied agent who was tapping our answers into a laptop chose not to include this information.

She got her commission and now I am faced with repossession of my house
Juliet Ignatiev
She also made the "mistake" of saying that his fever's had ceased a year previously instead of a month previously as we had clearly stated to her.

I believe she was simply very keen to get a commission which could have been over 4,000 for signing us up, and realised that if she included the facts about his fevers, we might not have been offered cover.

She then told us she could not show us the finished application form but persuaded us to sign a declaration saying we agreed with the content.

We trusted her.

She got her commission and now I am faced with repossession of my house and having to move my three bereaved children out of their schools and away from friends.
Juliet Ignatiev (Consumer), London

I sit astride the consumer/industry divide, as I work with a not-for-profit organisation dedicated to showing the lack of service the industry gives consumers, and demonstrating sustainable alternatives.

There is no doubt that commission grossly distorts what is sold, as some of the best value products (lowest charges, best results) have very low sales.

Equally, there is no doubt that large sectors of the market are not provided for at all, presumably because companies cannot see how to recover the huge cost of sales.

Commission blinds us all if we let it
Aidan Ward
Regulation as we know it merely adds cost.

The industry starts product design with what it thinks it can sell, not with what is needed by consumers.

Its marketing and incentive structure can only lead to more of the same. So the principal problem with commission is that it distorts industry perception of need and value.

I know fee-based advisors whose customer base is growing very rapidly. They are very clear about the lack of service provided by the industry.

Commission blinds us all if we let it.
Aidan Ward (Consumer)

I bought an ISA to repay my mortgage, but unknown to me the IFA set up an endowment instead.

I am now extremely wary of financial advisers and try to do my own financial planning
Lynda
When I realised what he had done and challenged him, he ripped up the paperwork and shouted angrily "what did you expect. I would only earn 400 commission on the ISA rather than the 4000 for the endowment."

Needless to say I am now extremely wary of financial advisers and try to do my own financial planning.
Lynda (Consumer)

As a financial planner with 13 years experience and advanced qualifications, I believe high upfront commissions can cause bias.

Commission also encourages advisers to focus their efforts on generating new sales rather than providing a long term service.

There should be a move towards ongoing fees (or commission in lieu of fees) to cover the cost of service.

The UK must save more and get serious about planning for our collective futures
Antony Williams
However, there will need to be three major paradigm shifts for this to happen.

Firstly, advisers and advisory firms must develop financial advice into a profession through qualification and service delivery.

Secondly, The UK must save more and get serious about planning for our collective futures.

Lastly, lower cost "wrap services" will need to become more widely available to create a more efficient way of managing the finances of the millions of people who don't fall into the "high net worth" category.

This will help to create an environment where service rather than sales pays.

Many financial planners will commit to providing ongoing advice for a fixed annual fee, with any commissions received being used to reduce or even eliminate the fee that the client writes a cheque for.
Antony Williams (Industry), London

I've just listened to your programme and I have been left with a solemn resolve to never buy a financial product without knowing the full cost and with all haste to exit from the products my wife and I have, and move them to simple assets or accounts I can understand.

We are fortunate in that the recent sale of our child care business has left us still owning the property and receiving rent.

The changes in April 2006 will allow these properties to be introduced into our pension funds, but this will be costly.

We will need to exit our more traditional investments. A SIPP provider will need to be paid to set up and manage the property-based pension fund, and to provide an income to my wife and I.

I am convinced it is the tax savings that causes the advisors to feel they can almost freely help themselves
Roger Nasey
Given the damning evidence of your programme I would like to know why I can't decree to the Inland Revenue that "I will manage responsibly the fund purchased by cash release from expensive rip-off insurance company based funds"

This would free us from all known and hidden expenses of attempting to provide for our retirement.

I consider it an infringement of my rights to force me to pay dearly for what now seems to be very poor guidance and advice.

The lever is to enable us to take advantage of the tax-free regime of a pension, and I am convinced it is the tax savings that causes the advisors to feel they can almost freely help themselves to our retirement provision.
Roger Nasey (Consumer)

Advisers who favour one product because of the commission when there is a more suitable one for the client do not deserve to be in practice.

But there are also simple market dynamics at work.

It is often the case that two or three products have no material difference between them.

If one is offering a higher promotional commission than the others, at no cost to the consumer, then an IFA is not wrong in making a business decision to select that product.

One wonders if it would not be a good idea to return to the system of uniform commission
David Cockling
It is no different from a plumber choosing to buy from a company who will increase his profit margin by discounting their supplies. One would hardly accuse the plumber of product bias.

However, it does matter if a consumer is disadvantaged.

One wonders if it would not be a good idea to return to the system of uniform commission. Competition could still exist via what services were provided in return for that commission.

I believe this is where a lower initial commission in favour of trail commission works for the consumer in giving an incentive for the firm to look after them if the client has the power to take the trail commission elsewhere.
David Cockling (Industry)

The financial services industry is sales driven. Generally people do not buy our products, they need to be sold them. Good ethical salesmen will always command high remuneration no matter what industry they operate within.

The biggest "mis-selling" facing our nation is the lack of selling of pensions and protection products to a populace that sorely needs them and will only realise when it's too late!

Removing commission will only make a dire situation worse!
Richard Carne (Industry)

I wonder if we will ever get to the point where it is possible to have a grown up discussion about this subject.

One of the problems is that commentators seem to know the price of everything and the value of nothing.

What matters is value for money and an absolute disclosure of total costs
Nick Bamford
Commission forms part of product charges. It is not in addition to the product charge. In some instances there are real advantages to consumers paying for advice through commission. In other instances there is less advantage to them.

The reality is quite simple. One way or other the client always pays either by fee or by commission.

What matters is value for money and an absolute disclosure of total costs.

If the consumer does not believe they are getting value for money they should simply sack their adviser and get a better one!
Nick Bamford (Industry), Surrey

The vast majority of consumers will not pay sensible fees, so the argument is not whether commission or fees are better, but whether the public want advice.

Fees are not an alternative to commission for ordinary people. Self-advice is!

It would be better to nationalise advice than deprive all but 2% of the population by moving to a full fee basis.

I should add that financial services is a very broad area, and I am talking about the savings, investment, life and mortgage part.
Steve Pett (Industry), Hankham

How much does Mr Lewis earn for reporting this to the BBC?

Surely everyone who earns a living is on a form of commission.

The regulations for the insurance industry are ludicrous.

When I buy something from a shop the store does not have to reveal its profit margins
Rosemary Mack
The people in this industry have far too much red tape to deal with.

Everyone is entitled to be paid for their advice.

When I buy something from a shop the store does not have to reveal its profit margins!

What Mr Lewis doesn't seem to appreciate is the time taken by IFAs in researching the products they sell, and the reports they have to prepare.

It's not just about the time they sit in front of the client.
Rosemary Mack (Consumer), Wimborne

I have used three insurance brokers over a 15 year period. Two were very good and the other OK.

Historically, commission was the assumed way of doing business. And in 1989 when I first sought advice my father suggested I ensured the commission paid on my life policy was fair when I took account of the time my broker spent with me and the work involved.

When the commission was disclosed it seemed high, but I did not question it. Instead I made sure the life policy I got was the best.

I would rather pay a fair commission rate than a fee
Tony Morgan
When compared to my local bank, the premium was lower, and the sum assured on offer was higher.

Since then I have always tried to ensure the commission is fair for both me and my IFA.

If I make it too low she will not come to visit me, in my time, on my premises.

I would rather pay a fair commission rate than a fee.
Tony Morgan (Consumer), Nottingham

Today I have received notification from one provider telling me of higher commission rates on certain pension products.

I accept that charges to the client may stay the same and commission payable is simply a distribution expense for the product provider, but if changing commission rates has no effect on distribution levels why would any provider willingly and freely increase its distribution costs by increasing commission?

Surely if the provider was any good, logically it should pay no commission at all and maximise its profits?
Gillian
Or put another way, if there is no bias why do they not reduce their commission (sorry distribution costs)?

Surely if the provider was any good, logically it should pay no commission at all and maximise its profits?

It was also argued that plumbers and painters would not pay fees. But I pay a fee for their time and their work when they do a job for me.

Their time, advice, knowledge and labour are not free nor are they paid for by product providers, so why is it so hard for anyone to see that all services cost something and need to be paid for?
Gillian (Industry), Ipswich

Commission has become a dirty word in the media over the last 10 years. It is not unreasonable for any business to earn a margin. Insurance has increasingly become a commodity with insurers packaging off-the-shelf products.

The FSA view insurance as a product, rather than advice-driven business.

Clearly a customer should always ask what commission is being earned and decide if it represents good value?

Few people begrudge a 100% margin on desirable goods. A 10 - 20% margin which is typical in general insurance is not unreasonable to cover the cost of transacting the business.

Consumers and business customers have the ultimate sanction, they do not have to buy
Richard
If a comparison is drawn to the second biggest transaction in most peoples affairs, the purchase of a motor vehicle, the dealers and manufacturers margin is no clearer, but there is no outcry.

Consumers and business customers have the ultimate sanction, they do not have to buy.

The advice they get up until the point of sale is normally free, not to mention there are plenty of brokers who will share their margin to secure the business.
Richard (Industry), Bristol

You appear to be surprised that consumers do not want to pay IFAs fees for advice.

I am amazed that you should even have to ask this. It is because of you Paul Lewis, and people like you.

You have over the years constantly told consumers that this is something they are entitled to for free. So the present dilemma is your fault!

How great is this irony? That under the old system you referred to, the risk of commission causing bias could not arise.

Surely this is the solution, with a regulator to balance what would otherwise be the anti-competitive effect.
Keith (Consumer)

There is a heavy bias towards commission over fees, for the very simple reason that fees are taxable (VAT is charged) whereas commission is not.

In fact, commission paid on a pension product will actually get tax relief.

So commission is actually in the consumer's interest, especially as they do not have to find the money up front.

There is a strong case for making the tax treatment of commission and fees more even.
Chris (Industry), Salisbury

In 10 years I only ever sold two mortgages needing endowment cover, out of many.

If you work in a rural area, no company can afford to employ an adviser other than on commission. The costs are too high.

Commission is no different than profit to a big store. Do you complain because the binoculars you bought are too dear?

There is always a 14 day cooling-off period for any sale.

Remember an adviser is self-employed, has to provide his own car, fuel, phone, and other costs.

He has to attend regular training for new products, travelling many miles, with no allowances.

I reckon by the time all costs, income tax and stamp are paid, allowing for young couples falling out and commission needing to be repaid, an adviser keeps about 33% of commission. .
David Vinter (Industry), Lincs

I insure commercial property for clients occasionally and split the commission with the insurance broker.

The latter's fee is based on 40% of the premium which the insurance company pays. I was staggered when I first learned a few years ago that the brokers commission was 40%, especially as this is repeated annually.

On selling insurance and pensions, completely the wrong body pays the fee, and this obviously will encourage the less than scrupulous broker to direct clients towards the companies that offer the larger commission and also the more expensive products.

I have complained on many occasions over the past 15 years about this to the FSA
Nick Greaves
The whole system is symmetrically back-to-front. Why it has not been changed I cannot think. Well actually yes I can: there is too much vested interest and too much easy money at stake for the brokers and the insurance industry.

FSA changes might have some small effect, but it would be far simpler, quicker and cleaner to reverse the system so that a broker collects his commission from the purchaser and not the vendor companies.

It is amazing that this system seems to have received so little comment.

I have complained on many occasions over the past 15 years about this to the FSA, its predecessors and other official bodies, including MPs.

Absolutely no response other than "We are looking into it, and we are aware of the position on commission".

If the Money Box programme can do anything about it, then the nation will owe the programme a great debt.

The brokers and insurance companies might not be so pleased though.
Nick Greaves MA FRICS, Industry

I run a small IFA practice, specialising in mortgage advice.

We always disclose the amount of commission we will receive
Paul
Whenever we first meet a prospective client, we have to explain how we are remunerated and offer the option of the client paying us a fee for any advice we give, with any commissions received being offset against our fee.

As yet we have had no clients who have opted for this option.

In addition, at the time of making a recommendation to a client we always disclose the amount of commission we will receive.

How much more transparent can we make it?
Paul, IFA (Industry)

The original CRA research was used for the preparation of the FSA's research paper.

This paper said it takes on average seven hours to advise and execute a contract for a client, and then failed to take into account any ongoing costs.

Using this figure, it is clear that for the majority of people commission is the cheaper option.

The only place where anyone can see 8% commission on a single premium investment is within a bank, not an IFA firm
Doug Brodie
The research also failed to point out it has been a regulatory requirement to disclose all charges and commission to a client before any application is made.

CRA was inconclusive about bias, however it is plainly evident in the commercial arrangements between banks and the product providers.

To the best of my knowledge the only place where anyone can see 8% commission on a single premium investment is within a bank, not an IFA firm.

An important bit of analysis should be to ascertain whether the client is disadvantaged by a higher commission rate.

The charges in the contract will actually be identical, it is just a question of how much commission the provider wishes to pay the distributor.

There is also a suggestion that clients don't like commission.

This is simply a guessed conclusion of poor research.
Doug Brodie (Industry)

Commission used to be paid at the same level by all providers until the Office of Fair Trading said that advisers should be free to pay more for the sake of competition.

Get rid of independent financial advice and you will throw unsuspecting people into the arms of the big banks
Hilary
Most advisers have for some time offered the choice of commission or fees.

If commission is driven out of the system it will create a massive underclass of people who will be prevented from having the advice they need because the fees charged will be unaffordable.

Get rid of independent financial advice and you will throw unsuspecting people into the arms of the big banks.
Hilary, IFA (Industry)

Commission levels affect sales?

I'm astonished that this is not self-evident. And not in the least surprised that the insurance industry then denies all bias.
Greg Heys, (Industry)



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SEE ALSO
The sins of commission
10 May 05 |  Moneybox
Internet links and helplines
12 May 05 |  Moneybox


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