Advice or Products? Fee or Commission?

A documented financial plan which spells out the steps required to achieve financial security and peace of mind is the end product of financial planning. As most people don't have the discipline or knowledge to formulate such a plan, the question is how much would you pay for this service?

The extent of the planning process varies from adviser to adviser with no published remuneration rate. Perhaps more practically, financial planners are often sceptical about billing for financial planning and hence choose not to be paid for this service but rather for the rewards contingent upon the implementation of the plan. Usually this implementation requires the purchase of financial products for which the product provider is prepared to pay a commission. So what should essentially be a distinct two step process of the provision of financial advice and secondly the provision of financial products becomes morphed into a single process rewarded only by the product provider.

Moral dilema

A survey commissioned by Xchange Solutions for Markinor found within consumers an "overriding trend to associate financial advice with financial products." This is turn gives rise to a moral dilemma for financial planners i.e. should his or her loyalty lie with the customer or with the product provider? The true question is whether this conflict should even be allowed to exist.

Professional mindset

Imposing a fee only or commission only regime on financial planners does not address the root issue. Such a proposal would never have been necessary if financial planners all acted in the best interests of their clients. The real antidote to commission driven sales is a professional mindset that places the interests of the client above all else.

The real issue

Ian van Schoor, CEO of Marketing and Distribution at Liberty Group says: "The fee versus commission debate is not the real issue. The real issue is the preparedness of the adviser to discharge his or her fiduciary obligation to ensure appropriate advice to the customer.

The economic outcome must be secondary and whilst there may be potential conflict, organisations have an obligation to ensure that staff manage those conflicts as secondary because the primary responsibility is the customer.

There have been varied responses to the authorities' and regulator's efforts to remove conflicts of interests and to secure better terms for purchasers of financial products. Recently, an intermediary body came out strongly in opposition to the new commission regulations on Retirement Annuities claiming that these would see the demise of the product."

Embracing change

Van Schoor says,"The truth is that product and pricing parameters should be driven by market dynamics and customer needs rather than legislation drafted in response to customer reaction. Everybody needs to embrace the commission regulation charges, it is here to stay."

The real professionals fear neither a fee nor commissioned based environment as they endeavour to do the right thing for their clients. The driving force of their actions is to honour the code of professionalism. The truly professional financial adviser will succeed irrespective of remuneration structures.