If it ain't broke - break it

The adage is somewhat out of date Martin. For the last 25 years successive Governments have tinkered with pensions without having the faintest idea how they work. The mantra 'If it ain't broke - break it' is nearer the mark. And so we have seen the near demise of Defined Benefit schemes, the undermining of pension funding by what can only be described as looting by the Treasury, and the consequent financial failures caused by the inadequate pension fund tails wagging corporate dogs. All subjects that are far more worthy, than the red rag ‘commission’, of journalistic comment and debate. There are only two real justifications for commission. Firstly, the vast majority of Joe Public can’t and won’t pay fees – not altogether surprising when you see some of the extortionate fees being charged these days. Banning commission deprives them of advice and trees can’t replace it because the incessant changes to Pensions legislation are barely comprehensible at times. Loser – the public. Secondly, you can’t expect any salesman in any capacity to accept payment on the drip over the lengthy pension product term involved. Given the average age of financial advisers, they would all be dead long before full payment for their service was achieved. In the meantime, they are running a business with overheads and mouths to feed. Up-front commission at least keeps the door to advice open. That’s the way you buy your car, your shoes and just about everything else. The commission argument with financial products only rages because the product is an intangible, but it is still nonetheless worthy of payment. The only difference here is that there is no clawback period with the sale of a car. If I can put that another way, the car manufacturer retains full responsibility for the product and pays the built in marketing costs in full up front. However, with financial products the provider hedges his bets by off-loading the risk to the sales outlets to reduce overheads and I would argue that this factor is more responsible than any other for churning, and ‘fees only’ won’t solve it. Fix clawback and you will fix most of the faults within the commission model. Arguably, to use your own words, charging fees can incentivise poor behaviour in the market and mean some advisers simply write new business to generate new fees even where there is no real reason to move the scheme - otherwise known as "churning"- the costs of this churning are ultimately borne by customers via enhanced direct costs. The only fundamental solution that would cut this gordian knot would be for the providers to provide the sales channel without intermediary recompense. ie direct to the public using a mixture of direct saleforce and relatively inexpensive media outlets. The full costs and responsibility would remain with them. I'm sure you will remember the old adverts “We pay no commission”. Let advisers then charge fees only for explaining and recommending a particular provider and product – that’s if they can find anyone to pay for the advice. That cuts out commission and all the implied ills. The question is, will the public then get what it deserves. I doubt it – why don’t we just say ‘commission ain’t broke – don’t fix it' at least not to the extent of binning it.

Posted by: Bob Stark