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Is it possible to reach a catch-all definition of commission that accurately reflects what a financial adviser does for an income?
To put a finer point on it: should the word 'advice' ever be used in a definition of commission?
We asked readers of IFAonline.co.uk and Professional Adviser magazine to give us their definitions of commission.
"Commission is a payment by the provider under a contract with the agent (adviser) for assistance provided in selling their product. In truth it has nothing to do with the clients (the buyer) or advice, but it does create a conflict of interest for the agent, if he is also providing advice to the buyer." Mark G
"It is the difference between the wholesale and retail price of the product - that's commission. It pays for everything advisers do as a firm - research, advice, CPD, administration, marketing various products. To refer to commission as the 'cost of advice' is completely misleading. After RDR, when IFAs have disappeared, most of what is now included as 'cost of advice' will still be part of the product charges. Products don't market themselves. The last government discovered that with stakeholder pensions." Ken Durkin
"At law the IFA is the consumer as he acts as the consumer's agent-so it is the consumer who pays commission. The industry (product providers) pays brokerage. Why are so many led to be confused by the agreements to produce business and the subjugation of the product providers?" Michael Bates
"A commission is something you get in the Armed Services if you can show that you can persuade those under you to do what you tell them. Or it is the charge a stockbroker levies for dealing on your behalf. It is also a great arguing point for the adviser community and helps the trade press to fill many column inches." Harry Katz
It is a bill issued to a client in respect of work done but settled by a product provider on his or her behalf (and inevitably at the client's ultimate expense). We no longer refer to commission in our engagement letters, our suitability reports or statements of account to clients. We refer instead to our fees need to be settled and there is a choice - the client can settle them direct or he can agree that the provider settles them on his behalf from the product/investment. In a post-RDR world, the word commission should disappear as should any insinuation that a financial salesman receives a backhander. Roll on RDR!" Simon Gould
"As long as the payment to be received by the agent has been negotiated and agreed with the buyer, it doesn't matter which cheque book is used to make the payment - the buyer's or the provider's. For example, it would be more efficient for a self-employed person to agree a fee for arranging his/her personal pension to be paid by the provider, thus making the fee tax deductible." Andrew Sellers
"I would suggest a slight change to Mark G (above) - I would add the word ‘potential'. We work on adviser charging already, so we quote a fee to a client. If the contract has no commission, they pay us the fee by cheque. If the plan offers the option of deduction through the contract, with no provider influence, and deduction through the contract makes sense (pensions, but not ISAs), then we'll deduct through the contract. If the product is one of the rare ones now that has no 'nil commission terms', if we think the best contract is one which pays commission, we will offset that commission against our fee, hence no conflict of interest as the potential has been addressed." Phil Castle
According to the Oxford English Dictionary, commission is: "A sum, typically a set percentage of the value involved, paid to an agent in a commercial transaction."
According to wikipedia: "The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people."
Meanwhile...
"This is very interesting. I was with a commission paying direct sales life assurance company for some 14 years many moons ago. Roughly speaking, we sold monthly or annual premium savings contracts on which the first one or two years premiums went to pay the charges of setting up the plan.
"Commission was related to the premium and would equate to a percentage of the first year's premium, depending on the plan term, from as low as 10% for a short term contract or policy to 65% for a large premium 25 year plus contract.
"The surrender value rarely equated to the premiums paid for some nine or ten years. The sales pitch was that God made little apples green so that they would have time to get ripe! The plans, in today's terms were good savings contracts delivering considerably more than building societies who were paying out about 3.5%.
"Your policy paid out over 5%, some of the better companies paid a terminal bonus like Standard Life and Equity & Law were two of the top payers. Allied Dunbar and Abbey Life concentrated on pension products and again the plans were heavily front-end loaded, but if they were carried through to maturity, the return was very good and indeed a lot of the Allied Dunbar Executive Pension Plans were over funded!
"I wonder today about the ethics of that situation. The media painted it all very black and the people who wanted out after paying a few years in to the plans screamed about unethical commissions being paid on their money, but the vast majority were well satisfied.
"Well the complainers have had their way, ably supported by the FSA and the FOS abetted by Gordon Brown and Ed Balls who between them have wiped out the savings industry.
"No IFA can sell - or should I say, "set-up" - a monthly savings plan because there is no longer any commission payments which allowed "indemnity terms" which paid the equivalent of a salary to the salesman 20 years ago.
"We now have the situation where 3% is insufficient money to give advice to set up an ISA and God help you if your client wants to switch funds: they want you to go through the same drawn-out procedure that you followed when you set the plan up in the first place!
"The 3% standard commission is not enough to cover the costs now involved, but in all honesty how much commission would you need to make it viable? I use the term 'commission' as we can relate to it. I would suggest that it costs about 4.5% to set up, if you charged that amount of money the savings would be non-viable because the profit for the client would be consumed by costs.
"Our 'masters' who work on inflated salaries seem to be out of touch with reality and I really believe tht when RDR comes in the small IFA firm will cease to exist. They will slowly give up shop and there will be no new entrants in to the profession and the savings industry will cease to exist and this once great country will not have a savings industry to invest in to industry to increase the wealth of the country.
"I could go on as having been in the industry since 1960 I have seen it all and I think will see it all finished within my lifetime! What a tragedy!
"THEY have got it all wrong and the Treasury Team in Parliament are not interested either - we are doomed!"
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Commission
As long as the payment to be received by the agent has been negotiated and agreed with the buyer, it doesn't matter which cheque book is used to make the payment - the buyers or the provider's. An example: it would be more efficient for a self employed person to agree a fee for arranging his/her personal pension to be paid by the provider, thus making the fee tax deductible.
Posted by: Andrew Sellers
Slight change to Mark G
I woiuld add the word "potential". We work on adviser charging already, so we quote a fee to a client. If the contract has no commission, they pay us the fee by cheque. If the plan offers the option of deduction through the contract, with no provider influence,and deduction through the contract makes sense (pensions, but not ISAs), then we'll deduct through the contract. If the product is one of the rare ones now that has no "nil commission terms", if we think the best contract is one which pays commission, we will offset that commission against our fee, hence NO conflict of interest as the potential has been addressed.
Posted by: Phil Castle
According to Towry's Andrew Fisher ...
... it's commission (bad) when I get paid 0.5%pa trail from a fund i do not influence, but it's a fee (good) when Towry gets a much larger payment in pretty much the same way from a fund they do influence. And apparently the FSA agrees!
Posted by: Neil F Liversidge
The difference between
the wholesale and retail price of the product - that's commission. It pays for everything advisers do as a firm - research, advice, CPD, administration, marketing various products. To refer to commission as "the cost of advice" is completely misleading. After RDR, when IFAs have disappeared, most of what is now included as "cost of advice" will still be part of the product charges. Products don't market themselves. The last government discovered that with stakeholder pensions.
Posted by: Ken Durkin
Commission
At law the IFA is the consumer as he acts as the consumer's agent-so it is the consumer who pays commission. The industry (product providers)pays brokerage. Why are so many led to be confused by the agreements to produce business and the subjugation of the product providers?
Posted by: michael bates
Definition of Commission
I earn commission on products sold that reflect the time & effort put in to not just the sale earnt from but for all the work put in on deals that do not proceed & for the free advice given to clients when no sale is expected. The overall commissions earnt in any one year when divided up by the hours worked for my specific expertise is fair & commensurate albeit in this current financial climate my hourly worth has decreased as clients expect far more free advice & to chat generally plus I'm spending far more time raising finance that does not always proceed. If the commission earnt on any one product sold only reflected the hours invested in that particular sale, we would all soon go out of business & if no commission were received, I would need to charge a client £150 per hour whether a purchase of a product was made or not. I think most clients would find this onerous & would seek advice less than previously & some not at all & leave themselves exposed. This is evidenced by what happened to Pensions commission when reduced dramatically as less people now take up a pension compared to the 1980/90's when salespeople actively sold pensions as they paid well. As a result more people no longer plan for their retirement which is far worse than the costs charged within a pension to fund the previously higher commission levels. The mark up on clothing, books, petrol, eating out etc is not queried as unfair as everyone expects a business to earn yet our profession is constantly knocked for the level of commissions earnt yet we add value unlike most other products & services sold that add no value nor offer an ongoing quality service for the life of the product bought.
Posted by: Laura Stonard
Pay received by agent.
A commission is something you get in the Armed Services if you can show that you can persuade those under you to do what you tell them. Or it is the charge a stockbroker levies for dealing on your behalf. It is also a great arguing point for the adviser community and helps the trade press to fill many column inches.
Posted by: Harry Katz
bring back honesty..
simple solution is to re-introduce the max commission agreement then everyone knows the max "commission" paybable, the cowboys taking 7+% will be closed down and the good guys left to run the industry with trust at the forefront. Not difficult to discuus with client, we are offerred x we will charge y, shortfal you pay Mr Client or we rebate. Most business is factory gate priced so makes it more managable.
Posted by: Fraser Brydon
Summed up nicely by Laura
There is no such thing as free advice and Laura (22nd April) has proved that very eloquently in her piece. She admits that you cannot earn a living without selling a regulated commission paying product. Ask clients what they want. The answer is more likely to be advice not another policy! I am sure that Laura works both hard and ethically, but the model is clearly demonstrated as a conflict of interest.
Posted by: Nigel Barker-Smith
Commission
In the early 21st century, commission was one mechanism that could be selected by a a client as the means by which their adviser received compensation. Provided that the client was offered an appropriate explanation of the various mechanisms available to them and had then selected the one that best suited their requirements, commission payment was often an extremely suitable solution for all parties involved in a transaction. Unfortunately, commission died out along with the general availability of financial advice for the population in 2012. This was due to the combination of a range of factors including: the failure of many advisors to offer or explain the options available to their clients; the greed of providers who saw the elimination of commission as a means to improve their margins; the damascene conversion of some multinational EBC's who (following being caught in some unsavoury commission practices themselves ) suddenly saw commission as the work of the devil; and the work of a regulator driven more by the need to be seen to be taking draconian action than consideration of the need to maintain readily available financial advice for the general population. RIP an old friend who, like many departed friends, will only be truly appreciated after their departure and should generate remorse amongst those who took him for granted and shame amongst those who never appreciated his true qualities whilst amongst us.
Posted by: Dai B
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Commission
Commission is a payment by the provider under a contract with the agent (adviser) for assistance provided in selling their product. In truth it has nothing to do with the clients (the buyer) or advice, but it does create a conflict of interest for the agent, if he is also providing advice to the buyer.
Posted by: Mark G