30th March 2020
1st April 2020 will bring with it the dawn, or the dusk of ‘Independent Financial Advice’ in Ireland. I really have no clue which way it will go! At least initially, finding an actual living, breathing and practicing ‘Independent Financial Advisor’ in Ireland may be like the proverbial hen’s tooth. (Wouldn’t that be a novel name for a Financial Advice firm – ‘Hen’s Tooth Independent Financial Advisors’!).
This week I share with you:
Firstly, and most importantly, I hope that you and your loved-ones are well – and adapting the current reality. While it certainly has it’s challenges which we are all keenly aware of, I hope you are also seeing a couple of potential up-sides? Some people I’ve spoken to over the past week have told me of their new-found ability to work remotely with technology, of a more comfortable and less stressful speed of life, of now having time to think and reflect.
I guess we all have a choice; to either look at this time as an opportunity to complain and be fearful, or a time to practice resilience, to improve or grow in some way. We have that choice, right!? In my own case I have never been busier – which has been a surprise to me. Due to the current reality I am getting to focus purely on Financial Planning for clients. The training work that I have been doing has disappeared. This has forced my hand to focus 100% of my efforts on the FP side of what we do at Informed Decisions. I see that as a huge plus, as that shift is something I have been working towards! We are now engaging with new and existing clients via Video-Conferencing and phone call. I’m travelling less, and therefore focusing more and more on helping clients with their Financial & Investment Planning, and guiding them through what has been, and remains to be, challenging times. I feel very fortunate to be able to do this. Ultimately, for all of us, up-sides can be hard to find, or at least to recognise, but there’s often at least one or two up-sides that come about in times of adversity?
Independent Financial Advice Ireland
As of 1st April 2020, under Central Bank of Ireland rules, for an advisor to refer to themselves as providing ‘Independent Financial Advice’ in Ireland, they must not receive any form of commission from any provider for any thing. They have changed the definition of ‘Independent’ – a word which most brokers, advisors and such firms currently use when describing their financial advice services. For example, If I was a broker who sold policies on behalf of 5 different companies, and received various levels of commissions from each of these companies depending on how much of what I sold to clients, I could, up to April 2020 have called referred to this as ‘Independent Financial Advice’. That is no longer the case as of this Wednesday.
I would like to point out that an advisor receiving a commission does not make that advisor a bad advisor. Similarly, an advisor NOT receiving a commission doesn’t make them a good advisor! That is a fact. When I use the work ‘good’ here I am referring to an advisor having the proper intent and the proper ability to do what they are responsible for helping their clients to achieve. I understand why many people prefer to work with a genuinely ‘Independent Advice Firm’ but please don’t let the fact that someone may no longer be an ‘Independent Financial Advisor’ stop you from engaging with them, and benefiting from the massive value that they can potentially be to you.
In my view, irrespective of how someone is paid for whatever product or service they provide us, provided we feel we got at least as much value as the level of compensation we paid, then it has been a successful interaction or relationship. That same principle applies, I believe, no matter what way they are paid for the value they bring you.
I wrote about this proposed change in Jan 2019 in Blog 96 and Podcast 119. The Central Bank proposal have since been through a feedback process (Consultation) with the relevant industry stake-holders (of which there are many powerful entities!), and it has come through that process intact, and into force on 1/4/2020.
As of that date, any advice firm, investment firm, brokerage, tied agent etc etc must NOT claim to provide ‘Independent Financial Advice’ on their website or any documentation if they receive any form of commission.
That might sound simple thing to adhere to you may think? If a firm want to call themselves ‘Independent’ they just stop taking commissions surely!? In reality it is not that easy – many firms have been operating on the commission model forever – they rely on the commissions from selling new policies and from keeping existing policies on the books in order to keep the light on, pay the wages, bonuses and over-heads that they have become accustomed to. Walking away from commissions would be a kamikaze move on the part of 99% of financial advice firms. They won’t do that.
It is far easier for a firm like us here at Informed Decisions, who have never received commissions, to continue to operate on the independent basis that we do. In reality there will be, as of April 1st a handful of Independent Financial Advice firms in this country. Fact.
On their websites firms that receive a commission from any source now need to outline the commissions they receive. You will now see firms put ‘fee pages’ on their website, where they never had fee pages before. While this is a step towards transparency it seems these pages are mostly the same generic text, and links to insurance company websites.
In reality these new pages will likely be a waste of time – they are just a list of blurb – and then links to each of the insurance companies that they have agency agreements with. On the insurers website you will then see the list of the max commissions that they will pay advisors that sell policies to clients on their behalf. As a sample:
Advisor can get max 225% of your first years premiums if they sell you a protection policy (e.g €100pm Life Cover policy = €2,700 commission payment)
Advisor can get max 5% of the value of what you invest if they set up an Approved Retirement Fund or Investment Product (e.5 €500,000 ARF = €25,000 commission payment)
They also list the various on-going annual commissions they will pay the advisor if they keep you with that company.
So What Are Firms Doing To Adapt and To ‘Work-Around’ The Changes!?
Marketing departments of some of the biggest commission-based firms have been working hard to come up with new terms to convey an all-togetherness and wholesomeness without using the word ‘Independent’! Here are a selection now being used:
We will see a lot of the above over the next months as firms update their websites and materials (if they haven’t already). Hopefully it doesn’t cause even more confusion for consumers trying to find what they are looking for.
How Much Commission Do Advisors Get?
Commissions are not going away – they serve a purpose – they are not a bad thing – heck I worked on that basis in the past myself. What was interesting in all of this, in my own situation, is that in order to work in a truly ‘Independent Financial Advisor’ I had to create a firm from scratch. We deliberately set out to not work on a commission basis – not because we think commissions are evil or bad, but because it was not aligned with my own personal values and how I wanted to work with clients. 100% of our income is derived from what clients knowingly and willingly pay us for what we help them to do. That forces us to deliver value to clients – to deliver a personal and value-add service at a fair price.
If your advisor works on the basis of commission they may still be a great advisor, no question. What the new Central Bank changes will hopefully do is make fees and charges more transparent for clients to understand, to help clients and advisors to have open conversations about the commissions being paid and the value that is being delivered.
Imagine you have a pension pot which you have been building over the years, an Executive Pension scheme. You are retiring and taking your 25% Tax Free lump sum and starting to draw your 4%. You move it to an ARF to do that, with your existing advisor. In this instance your advisor is Commission-based and can therefore, according to the disclosures on most sites, receive up to 5% Initial Commission from most of the Insurance Companies for moving you from the Executive Pension to an ARF with that insurance company.
If your pension pot is €1m they could therefore receive a cheque of up to €50,000 for setting up the ARF scheme. They could then receive up to 1% per year thereafter, or €10,000 per year for keeping you with that company.
While it will be paid via the Insurance Company, you will be paying for these via fees within the scheme. And don’t forget these percentages are the payments to your advisor only, they do not include the fund fees, custody fees, admin, trusteeship, support, and operational costs of providing the products to you. These fees were found to total average of over 2% per year by Department of Social Protection research paper here. If you advisor gets less commissions then invariably you will pay less fees overall. The trouble begins when the client is not clear on what they are paying, what the advisor is receiving and there is a lack of clarity around the transaction. In those dark shadows Trust can never grow – Trust ain’t a mushroom so-to-speak!
Claw-Back and Churning
If you look at any of some financial advice firms’ websites they now quote the same standard text around all this. You will see a term referred to as ‘Claw-Back’. To explain; Imagine you set up the ARF with your advisor and he or she suggests doing so with Insurance Company A (for whatever reason) – then 3 years later you ask to be moved to Insurance Company B (due to fund performance, for example). Depending on the company A deal your advisor had, they would have some of the €50,000 taken-back under the ‘Claw-Back’ terms if they moved your ARF in that time-frame.
If however the ‘Claw-Back Period’ (often 5 years) had passed, the advisor could move you to insurance Company B, pay zero Claw-Back to Company A, and receive another max 5% of your funds via Company B. Again, you will most likely pay for this max 5% over time through fees within the scheme. Make of that what you may.
This is what is known in the industry as ‘Churning’ – an act still carried out by advisors and which is a blight on the reputation of the profession of Financial Advice. The new Central Bank measures are an attempt, I believe, to make it less easy for this activity to continue. Time will tell.
If you felt that scheme set-up was worth a max €50,000 to you then great. If your advisor is providing a superb service, helping with all aspects of your Financial lives, and help you achieve your financial goals then great. If you feel you are getting value for money from the max 1% per year that they get from your funds, then great.
If, however, they are delivering zero service, zero contact, zero support and zero guidance, there is an issue. If they are sharing with you a statement each year or bi-yearly and doing little else, then you may have a problem. Indeed the entire Financial Advice profession has a problem – it will not exist in 10 years time if people do not get value for money from it. That is a genuine fear I have for the profession of Financial Advice, Financial Planning.
If you, as a client, feel you did not get at least as much value as the level of compensation you paid, you will walk away from advice if and when there is a alternative option. If clients have investments or pensions, or regular savers, or insurances and feel they are not getting a win-win in the relationship they will start to demand more service and more care for the fee they pay, or they will walk. They will demand and force the change.
Interestingly, on the Central Bank website you can also see all the submission letters offering feedback from the various stake-holders when the Central Bank first proposed these changes. The main commission-based operators wrote submissions outlining how these changes would not benefit consumers. The entities who support the few of us who operate without commissions, such as Vanguard Ireland and Conexim Ireland, wrote to encourage the changes and how it will benefit consumers. I guess time will tell who was right!
My hope is that these changes will encourage greater levels of transparency and levels of service. Hopefully too greater demand from clients for value and real guidance and support, greater levels of engagement from clients with their advisors.
In my own opinion removing commissions entirely would have been a bad move for consumers – it would not have helped – as we saw in the UK when they banned commissions a number of years ago. Transparency and disclosure however will hopefully help.
If we can increase the levels of trust for Financial Advice or Financial Planning (call it whatever you like) then we will increase the numbers of people that engage with it. We will therefore increase the chances that consumers can benefit from getting the right guidance, at the right price, from the right advisor, to help the client to achieve the things they want to achieve. In that event, whether that is via commission-based advisor or an Independent Financial Advisor will largely be irrelevant.
Paddy Delaney QFA RPA APA
Our Independent Financial Advice Approach – More Info
Best Ways To Get Financial Advice In Ireland – Blog 96
The Hidden Fees You Pay Within Your ARF – Blog 121
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