Pensions  

Making the case for commission

In a recent article I suggested a blueprint for investment advice, using the approach used to manage pensions funds and life companies. There is a snag.

Giving such advice requires a combination of skills: actuarial, legal, investment, tax and regulatory expertise. A life company or a pension fund can call upon a range of experts, but how can an individual customer afford them all? He needs all these skills in one person who must also have excellent communication and selling skills. Do not underestimate the latter, as faced with uncertainty the client will just postpone decision.

This might suggest that advice can only be affordable for the well-off. You could be right. The do-gooders have thrown the baby out with the bath water. Commission has now become a taboo word. Ros Altmann said the other day that it ought to be banned on annuities without bothering to find out how much it was. It is a concern that such shallow views are taken seriously.

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In fact there is nothing wrong with commission per se. Ask any HR manager and they will talk about performance-related pay or payment by results. Is not that what commission is? The problem was – well there were two: it was paid by the provider not the client. That should not matter so long as it was disclosed at the point of sale and the rate did not vary from provider to provider. That was where we were before the Office of Fair Trading said commission agreements were anti-competitive. The other problem was that the wrong criterion was used to measure success.

By killing commission and introducing complex and dense stuff such as the retail distribution review and the fancy stuff that former director general of the ABI Otto Thoresen created, we may be all right in the future; but in the meantime, savings rates have declined and many are set to retire with inadequate pensions. What is more, by saving less they are spending more and enjoying a higher standard of living than they should, so will therefore fall farther when they retire.

People said that commissions and charges were excessive, but failed to recognise that at least they made people save. There is an opportunity cost to inaction, which is greater than the charges inherent in action.

We are where we are. We do not want to overhaul RDR and have more uncertainty. We have built a mechanism for giving proper advice to those who can afford it. People should be prepared to pay £300 an hour, with perhaps five hours’ worth of advice as a minimum. That prices out those who can only save, say, £50 a month. I think for them a simple suite of products should be created:

1 You choose a target date, say 65

2 You choose whether to receive a lump sum or an income from that date

3 You specify your attitude to risk (cautious, normal, aggressive)