19th April 2021

Commission bias, still “more perception than reality”

The RDR did nothing to enable access to financial advice and the removal of commission on protection policies would result in a similar diminishing of involvement.  Not only would many more use the comparison sites, which trade on premium lists, but many, many more would not protect themselves at all.

Let’s rewind to 2006. 

Sir Callum McCarthy, then Chairman of the FSA, woke up with a big idea.  He unleashed this big idea at the September Gleneagles conference, postulating that the existing model was broken and there would be a consultation on the removal of commission from pensions and investments.

His rationale was predicated on past ‘miss-selling scandals’ – pensions, endowments, etc.

The industry is fully aware of how regulatory consultations progress, so over the next five years the FSA deviated from established scientific methodology and sought out evidence to back up McCathy’s theory.  They employed Charles River Associates to conduct a review into miss-selling and this uncovered two areas where commission bias was identified – mortgage endowments and with profit bonds, both of which, incidentally, were no longer sold by then. The verdict by Charles River Associates was that commission bias was “more perception than reality”. 

Forward now April 2021, we find the commission argument back on the menu courtesy of Schroders Personal Wealth, which recently announced it would not be taking any commission on protection advice from clients when discussing wider financial planning to help close the protection gap.

Firstly, let’s ignore the mumbo jumbo about this reducing the protection gap, which was last reckoned to be at £2.3 trillion, and look at this from a number of different angles.  Firstly, new ‘commission free’protection advice offering from Schroder’s ‘commission-free’ service is only available to wealth clients, so Schroders will have taken adviser charges already.  Their website gives an indication of the fees involved - a client investing £50,000 will pay a one-off fee of £875 plus £27.08 pm.  Additionally, there are investment fees of £45.83 pm, the equivalent of 1.1% of funds under management

When the investment reaches £578,000 it is capped at a bargain £9,975 one-off advice fee, £313.08 pm ongoing advice fee and investment fees averaging £168.58 pm.

Most advisers would suggest that this level of fees is what enables them to offer ‘commission-free’ protection advice.

However, let us concentrate on the impact of commission within a protection plan.  

If we take a couple each age 35 requiring a mortgage protection policy providing life or critical illness on an accelerated basis for £150,000 over 25 years.  If we focus on Zurich, which offers the lowest cost plan we can see that the premium is cut from £53.48 to £43.07 when no commission is taken.

Of course, a typical adviser will not be able to rely on one-off fees and ongoing fees of £000s, therefore they will have to charge a fee.  This is not easy to price because the following factors need to be taken into account

1. Time expended on discussing the cover required
2. Uncovering any underlying health complications
3. Assessing the most appropriate plan, which is not an easy job if critical illness is included
4. Completing the online application
5. Dealing with the matter of trusts
6. Chasing the insurer and possibly the GP – something fairly common since Covis-19 took hold
7. Sometimes discussing a variation in acceptance terms offered 

All of this is on top of the normal costs of operating a practice and an additional regulatory premium for the next big idea to spring forth.

Now, it might be that a fee of £600 is suggested.  Will the clients agree to this or will they opt for payment to be built into the premium?

Why is it that people buy cars and other goods on credit? Is it because they do not have the funds available for outright purchase or have they decided that it suits them to spread the cost over a number of years and keep their funds available for other potential uses?

Another question relates to commission bias. Does it exist, can it exist? Can a rogue adviser over-insure somebody?  Firstly we can trot out the old saying that no widow ever complained her husband was over-insured.  More tellingly, I have found only a few instances where a Financial Ombudsman has investigated over-insurance indicating that it is not a prevalent practice. 

Would commission free protection advice remove the £2.3 Trillion protection gap?  The answer to this risible question must be self-evident to anybody within the industry.

Alan Lakey, Highclere Financial Services Ltd

Protection, Regulation