The jury is out on whether advisers in the UK would welcome a return of commission payments as a way to bolster their business.
As the Financial Conduct Authority (FCA) contemplates the reversal of a key tenet of RDR, just over a third (34%) of advisers say they would like to see commission return as a revenue source in some shape or form. This compares to 53% who would not welcome the change and a further 13% who say it is still too early to make a decision, according to a new report from CoreData Research.
If commission really is the dirtiest word in financial services it appears a number of financial advisers are willing to sully themselves in a bid to flourish in a post-RDR world.
Much has been made of the FCA’s potential U-turn, with many dubbing it a “retrograde step” but there is clear division in the financial advice market as to whether it would benefit them, the banks and the mass market investor.
The creation of an advice gap is considered to be one of the most significant consequences of the RDR, with many mass market investors becoming unwilling or unable to pay for full, regulated financial advice in a post commission world.
More than half (53%) of advisers admit they would change their business models to include a commission element, either “significantly” or “slightly”, should this be allowed.
The fact over half of the advice market would welcome commission back as a business revenue source reflects just how hard the RDR has hit the market and while some have made the transition to a fee-based model, many advice firms are struggling to grow.
Although a third (34%) of advisers believe the ability to use commission as a payment method would help them re-engage with the mass market, they think the banks will be the ones to prosper from such a move. Almost half (49%) claim the FCA is considering the return of commission to entice the banks and building societies to begin serving the mass market once again.
This is further reinforced in the research by over two-thirds (70%) of advisers claiming the return of commission in any guise would be beneficial to the banking sector, compared to only 32% believing it would benefit the adviser market.
There has to be a sensible balance found by the FCA. The simple fact is if the mass market investor is going to be engaged in this space the banks will want a piece of that substantial pie.
Just prior to the RDR, we conducted research which found the general public was willing to pay £39 an hour for advice; by contrast, the average financial adviser values their service at £150 an hour. Our research was done in 2012, but that gap is never going to close to a point where both parties are satisfied. For the advice gap to be tackled, a commission element is the most plausible outcome for both parties.
The burden of moving from a commission to a fee-based structure is most palpable among advisers with less than £25m of client assets. Almost 60% of this segment would like to see commission re-introduced, this compares to only 41% of those with more than £25m under advice.
As expected, 70% of firms which are still trail-reliant (i.e. more than 15% of their revenue comes from trail commission) would welcome the return of commission, admitting they would make changes to their business model to account for this.
Advisers acknowledge the return of commission would help tackle the on-going concerns of an advice gap, with 53% claiming the mass market would benefit from the re-introduction of a commission element.
However, most advisers feel this change is being tabled purely to bring the banks back into play in the advice market. Almost half (49%) of advisers believe the FCA is considering the reintroduction of commission to encourage banks and building societies to return and assist mass market investors. In fact, 70% of advisers strongly agree the banking sector would be the big winner from this potential move, vs. 32% for the advice segment.
The worry for the FCA would be opening the door to misselling. Banks were no angels with a series of them having been fined for misselling and financial advisers feel the same with over a quarter (27%) stating that bringing back commission would encourage the return of misselling in the IFA market.
The return of commission would put the FCA’s head on the chopping block, if it isn’t already! One mistake by either the banks or financial advisers and the industry will be hunting for the regulator’s head.