Following the article about fees v commission, you may be interested to read a little more about the background behind the change from a profession that was previously driven by commission. And, more specifically, why the UK banned commission from investment accounts.
Paying commission on investment products can make a serious dent in your wealth
Buying an investment product that pays out extraordinarily high commissions to your adviser, without any transparency or disclosure, can make a serious dent in your wealth, hampering your ability to meet your long-term goals.
This animation reveals the stark difference between paying commission on your investments and paying transparent fees:
Note: Figures assume an investment growth rate of 7% and nil inflation on both approaches. 1% ongoing Adviser Fee is also applied to both approaches.
Commission payments created a conflict of interest
Before 2012, many financial advisers in the UK earned commissions from product providers to recommend their investment products.
While this was legal, it created an apparent conflict of interest as it made it hard to establish whether advice given was in the best interest of the client or was driven by the desire for the potentially high commission the adviser could earn.
Apart from the obvious conflict-of-interest problem, commission was often sold to clients as a cost to the provider. However, in reality, the commission was paid by the client – through increased product fees and account lock-ins.
In 2012, commission-based fees for financial advisers selling investment products were abolished
The Financial Services Authority (FSA) was the regulator that preceded the Financial Conduct Authority (FCA).
The FSA were in charge when commission-based fees for UK financial advisers selling investment products were abolished. The reforms, introduced in December 2012, formed part of a series of changes in the financial services sector called the Retail Distribution Review (RDR).
Rather than taking commission, advisers had to charge clients directly for their services.
The aim was to:
- Reform the financial advice profession
- Increase customer confidence
- Reduce conflicts of interest
- Improve transparency.
At the time, an FSA spokesperson said: “The changes will improve customer confidence – we want people to feel that they are getting a service from their financial adviser that is relevant to their circumstances and in their best interests.
“These changes are about making the cost of advice clearer […] Customers will now know how much advice is costing them, the service that they are receiving and be reassured that their adviser is qualified.”
Initially, many financial advisers were concerned that clients wouldn’t pay for advice
At Ascenta, my colleagues and I were all working as financial advisers when the change was made. Our biggest concern, along with many of our peers, was that clients wouldn’t pay for advice.
However, that quickly proved untrue. In fact, the benefits of RDR were immense.
Clients now enjoy greater transparency, and know precisely what they’re paying for.
Meanwhile, financial advisers are incentivised to recommend solutions based solely on suitability, rather than commissions.
The financial services sector has also seen a significant boost in professionalism. Not only has the abolishment of commission supported the profession but advisers must also gain higher qualifications to practice.
Other countries watched and followed suit
The Netherlands banned commissions from investment accounts in January 2014, and Australia also followed suit six years later, in 2020.
In the US, public demand, rather than regulation, has moved the majority of advisers towards a fee-based advice model.
By contrast, the majority of advisers in Singapore, Asia, and the Middle East still work on a commission-based model.
Change presents some challenges
Of course, the change from commission to fee-based financial planning hasn’t been without its challenges.
In particular, the transition to fee-based advice in the UK created an “advice gap”, leaving less wealthy individuals feeling underserved.
The good news is, this gap is beginning to be addressed, primarily by robo-advisers that charge lower fees for automated portfolio management.
However, for those who can access bespoke investment advice, the value of transparent, client-focused, goal-led financial advice has never been more evident.
At Ascenta Wealth, we’re committed to raising standards in financial advice. And we firmly believe the fee-based approach – that’s free from commission-driven incentives – offers the best foundation for building lasting client relationships.
We are completely transparent and never recommend anything we wouldn’t do ourselves.
