Central Bank consultation on how financial advisors are paid

[Brendan Burgess]

Extracts from the press release

• Certain types of commission and other inducements would no longer be acceptable under proposals
• Proposals will establish requirements for financial intermediaries to tell consumers how they are paid and introduce restrictions on financial intermediaries describing themselves as ‘independent’

The proposed measures require firms to avoid conflicts of interest created by poorly designed inducement arrangements and provide greater transparency for consumers about how a financial intermediary, whose advice they are relying on, is getting paid. The proposals will also introduce restrictions on financial intermediaries describing themselves as ‘independent.’

The proposals are set out under the following headings:

1. Inducements that give rise to conflicts of interest, and would no longer be acceptable, such as inducements linked to the size of a mortgage loan or inducements linked to targets that do not consider the consumer’s best interests. Examples of such inducements include targets linked to volume, profit or business retention.
2. Clarity about what constitutes ‘independence’.
3. Transparency of remuneration arrangements.
4. Acceptable inducements.

The proposals have been developed following analysis of this topic conducted by the Central Bank, including reviewing the position in other jurisdictions, emerging standards at European level, industry practices in Ireland and specific consumer-focused research.


The Consultation Paper provides an opportunity for industry participants and other interested stakeholders to highlight any implementation issues or unintended consequences arising from the proposals, as well as any suggestions to enhance the proposals to ensure they achieve their stated aim.

Consultation Paper

Research Paper: Consumer Understanding of Commission Payments

Submissions to the consultation paper, along with comments and queries, can be emailed to: Email: consumerprotectionpolicy@centralbank.ie

The closing date for submissions is 22 March 2018. All submissions will be published on the Central Bank Website.

 

[Steven Barrett]

What do you think about this Brendan?

I am largely for it. A few weeks ago, Davy brought a number of advisors and their spouses to New York for 5 days. Not really what you want from your advisor.

The independence definition is a big change, with an advisor's not being able to accept ANY commission if they want to be called independent. I have asked my clients what they think and they are happy to have the choice to pay commission or fee as long as everything is explained to them and there are no hidden fees.

What do other people think? Changing to a fee only basis is a massive change for an advisor that would need quite a lead in period so I could adjust how my business is structured.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Brendan Burgess]

Hi Steven

I haven't really studied it yet.

But I agree that anyone getting commission should not be able to call themselves "independent".

If they get commission, maybe they should be called "commission brokers" to make it absolutely clear.

Brendan

 

[Dan Murray]

The independence definition is a big change, with an advisor's not being able to accept ANY commission if they want to be called independent. I have asked my clients what they think and they are happy to have the choice to pay commission or fee as long as everything is explained to them and there are no hidden fees.

Hi Steven,

If you take AUM fees (say XX basis points for on-going service on a pension), is that deemed an inducement?

If yes, I think it would be hard to replicate this income from clients directly.

Some of the proposals look insane - e.g. the one about publishing all commission arrangements with all product providers - ouch!

 

[Conan]

This is a difficult issue. We are all well accustomed to paying for advice when it comes to doctors, solicitors, accountants etc. But historically a lot of financial advice (at least in relation to investment and insurance products) has been remunerated by means of commission. This means that clients don’t write a cheque to pay for advice but rather the advisor is remunerated by commission paid by the product provider. But obviously the cost of this commission is built into the product and therefore ultimately the client pays. The introduction of greater “transparency “ in commissions was designed to at least make clients aware of the likely commission involved (assuming clients read the disclosure documents???).
So if commission is banned, the question is whether clients will pay “reasonable” fees? If I go to a doctor I will pay €60 for probably a 5 minute consultation. If I go to a solicitor, the fees are likely to be well into 3 (or maybe 4) figures. But if I want advice about establishing a Pension Plan and thus need to discuss contribution levels, investment options, provider options, charging structures, fund manager options etc, then that may take some time (perhaps two or three meetings). So the difficulty is,
- will the client pay the adviser even if they don’t accept the advice/recommendations
- will the adviser provide the advice if they are unsure of getting paid.

The UK have partly gone down the road of restricting the commission facility, and the result is that many people cannot afford (or are unwilling) to pay for advice. So if the commission route is not an option, why would an advisor spend the time in developing an advisory proposal if they are not going to get paid.
The Fee only approach will suit those well used to paying fees for advice (dare I say the better off and the more financially aware). Those less well off and perhaps less financially aware (the group perhaps most in need of advice) will probably be the group most likely to resist paying fees in addition to the premium. They may just resort to “advice” from buddy which they would not do (hopefully) if it was medical advice.
And a final point to remember is that if we are discussing say a Pension structure, the client will get tax relief on the premium but not on any advisory fees. So if the advisory fees are paid out of commission (out of the premium) then the full amount is tax deductible. If fees are in addition, that is not necessarily the case.

Just as a “frictionless border” is difficult, so is the fees v commission problem. Theory is fine, particularly for Central Banks and Regulators, but when the “rubber hits the road “is when we find out if the theory works in practice.

 

[MrEarl]

Hello,

Long term I would like to see absolutely no commissions paid for anything (mortgages, investments, life cover etc.), that way all advisors would be paid on a fee basis by the client and there would be absolute transparency. However, I take Steven's point on needing significant lead in time to permit changes to his business model and no doubt, most others in the same industry.

As an interim measure, how about all providers pay the exact same fees / commission for the introduction of business ? That way, the advisor is not influenced by the level of earnings, or volume of business he/she is referring to each provider ?

 

[Steven Barrett]

Hi Steven,

If you take AUM fees (say XX basis points for on-going service on a pension), is that deemed an inducement?

If yes, I think it would be hard to replicate this income from clients directly.

Some of the proposals look insane - e.g. the one about publishing all commission arrangements with all product providers - ouch!

Hi Dan

No commission at all if you want to be called independent. From my reading of the document and talking to others, that includes AUM fees.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Steven Barrett]

And just to be clear, the Central Bank are not proposing the ban on commission. If you want to call yourself independent, you cannot receive commission in any form.

There is a lot of additional work that they are proposing such as having to state how you avoided conflicts of interest in every piece of business that you write. Along with MiFID II that is coming in in January, there will be a huge amount of additional reporting required by advisors. This will only add to the amount of paperwork that is required to set up a product for a client, which will mean higher fees. Something that a lot of people won't want to pay, so they will go to a non compliant "advisor" who will give poor advice and do it on the cheap.

Mr Earl

I agree with your proposal of getting rid of a lot of commission structures. The Central Bank proposed doing away with "clawback" commission structures. These are products that pay a high initial commission but the business has to stay with that company for a 4-5 year period. If it doesn't, the initial commission paid out in year 1 is clawedback back on a proportionate basis. I don't use those products anyway as I don't want to be on the hook for the fee I did for a job years ago. You could set up a pension for someone and 3 years later they move job and have a new work pension. And I get penalised for someone moving job? I prefer to be paid for the job when I do it and people have no issue with that, it is their expectation.

Their approach on mortgages is flawed too, wanting to ban commission on them saying it encourages brokers to push customers into taking on higher debt. With the Central Bank restrictions and strict bank underwriting process, that is very limited. And it is usually the customer asking how much they can get before they go looking for a house. They want the maximum they can borrow. They don't need any encouragement.



Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[corsair]

SBarret, your observations are valid.

More paperwork=more confusion. It's for our own good.

And I get that a proper adviser can provide a client a "100%" allocation, but where I struggle is when the adviser gets in excess of €30k with a single transaction and the client gets "100%" of their money put in. I may be missing something but 1+1=crazy. Something's not right. Those companies don't stay in business as long as the one's we know.

 

[Steven Barrett]

And I get that a proper adviser can provide a client a "100%" allocation, but where I struggle is when the adviser gets in excess of €30k with a single transaction and the client gets "100%" of their money put in. I may be missing something but 1+1=crazy. Something's not right. Those companies don't stay in business as long as the one's we know.

You are right, something really stinks. Those policies have high management fees to recoup the funds over the long term and some more. From what I hear from talking to broker consultants with the life companies, those policies are being used less and less.

Where I do see them being used a lot is with the larger brokerages. Places where the advisors are on a low basic and most of their income comes from targets. They charge the high initial commissions because their income relies on it. It should be changed to a lower initial charge and an ongoing service charge. MiFID companies can't use this structure but advisors are largely exempt from this legislation.



Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)