Recently there has been some debate amongst our peers on the subject of “free advice”.
In fact there really is no such thing as “free advice” when it come down to the financial intermediary.
There is however something called “cross subsidy”. This is usually seen where the adviser is paid through commission.
As an example of what happens let us say that the adviser meets two people. He then carries out work for both parties and that leads to the recommendation that the first client should buy an ISA (let’s say) and the second one should buy a pension plan.
So far so simple, but then the first client decides not to proceed. Client two buys the pension plan and the adviser is paid a commission.
Effectively the commission paid in respect of the second client pays for the advice received by both clients.
It is perceived by the first client as being “free advice” because of course they never had to pay for it. But in actual fact it was paid for by client two in the form of a cross subsidy.
Fundamentally, many of our peers see nothing wrong with this system.
In its favour is the fact that this cross subsidy allows access to the independent financial advice market for people who are not prepared to pay a fee (or not enough of a fee).
We don’t like this system. We think it is unfair to ask those who buy to pay for those who don’t (although we accept that there is an element of this in all aspects of business life).
Instead we operate a transparent and very direct system based on charging our clients for what they get.
So we don’t do things for free (or what might appear to be for free) but interestingly, and this is what gets me smiling when I come to work each day, we typically charge our clients less today by direct charging than we used to charge them when we operated on a commission basis.
Commission on investments and pensions is being abolished by the Financial Services Authority from the end of 2012. What we have learned in practice since 2004 is that transparent adviser charging is much better than the commission approach.