Watch your commission
The way commission is paid to people who sell pensions and other financial products has to change. The present system damages the reputation of the financial services industry, leads to customers being sold the wrong product for the wrong reason, and does not even make significant profits for financial advisers.
Not my thoughts. But those of the man who runs the powerful watchdog which protects us as buyers of pensions and savings plans and also develops the market in financial products.
Sir Callum McCarthy, Chairman of the Financial Services Authority, was speaking to leaders of the pensions and savings industry at Gleneagles hotel a few days ago. And he certainly knocked the ball of these key financial players into the rough and told them to play fair or he would step in to change the rules.
He didn’t say what alternative there was to commission. He said "the solution to the problem must lie principally with the industry". And he warned that it must "develop a full and appropriate response."
Meanwhile of course all of us have to decide how much to save for retirement, where to invest spare money, and how best to convert a pension fund into a monthly income we can live on. All of that involves financial advisers and choosing the right one is the big problem.
Two rules. First, they must be independent, in other words drawing their recommendations from the whole of the financial services market. Second, you should pay them a fee not commission and make sure there is no commission paid on the product. If you cannot afford to shell out £100 an hour or more for the work your adviser does, then borrow it from the bank or on a credit card and repay that loan over no more than two or three years. The alternative – paying the fee out of future commission – is saddling yourself with an expensive debt for the lifetime of the product. That can turn £1000 of fees into tens of thousands of poundsworth of reduced investment performance as commission drains away at your savings.
Find an advisor like this and you are half way to success. Add to that someone you trust, preferably from a company you have heard of which has done well over a long period for a friend or relative, and you will minimise the damage done by the present system which in Callum McCarthy’s words "serves neither the producer of the services nor the consumer of the services."
A warning growl indeed from the watchdog.
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