The Financial Times reported yesterday on a United Kingdom Financial Services Authority ruling that will eliminate commissions paid by fund managers and life insurance companies to financial advisors.
The change takes effect three years from now. The Financial Services Authority determined that commission-driven advice was closely linked with inappropriate product sales over a period of twenty years in Britain:
“The watchdog said it would ban product providers from offering commission to secure sales and ban advisors from recommending products that automatically paid commissions.
Instead, investors will be told up front how much advice would cost and will be able to choose whether to pay a fee or have the cost deducted from their investment. Crucially, the amount the advisor receives for recommending a product will be negotiated with the investor and not determined by the provider.”
The Times also published an opinion piece by Andrew Fisher (no relation), CEO of Towry Law, an independent wealth advisory firm. According to Fisher, commissioned financial advice is central to the distrust currently associated with independent financial advisors in Great Britain. Fisher gives the example that under the current system, a UK buyer of a £200,000 bond typically pays an advisor fee of £14,000 that is hidden in the total cost; under the new rules, an advisor will have to disclose and charge a more reasonable fee for advice related to a bond purchase, and the advisor will be freer from conflicts of interest:
“This inherent ‘product bias’ and ‘product manufacturer’ bias will not exist in the new world. The new rules will explode the myth that advice is free. Financial advice is not free – it never has been and never will be. The ‘old world’ pretence of “this advice is free for you because the product manufacturer will pay” is over. In the future, advisors will be forced to show consumers how much their advice costs and the consumer will have the opportunity to determine whether they consider this to be value for money.”
Transparency of costs is desirable in any transaction. As the US Congress considers proposed reforms of our own financial industry, it may be moving toward a similar outcome, but only time will tell.