Financial Advice

Financial advice is important. Most financial advice (whether independent or not) is funded by commission, paid by savings companies to financial advisers for the sale of savings products.

Some people believe that commission inevitably gives rise to a conflict of interest and creates the potential for poor advice and inappropriate sales. However, although a recent study did find some commission-related bias towards particular companies and product types, there was no evidence that commission was inducing advisers to sell where no sale was appropriate.

The Importance of Financial Advice

Financial advice covers a range of services:

. contacting customers who need advice and providing an opportunity for it;

. describing the nature and priority of different financial needs, and the various ways they can be met, even to customers who may not realise they have a need;

. explaining tax and benefit entitlements, including means-tested benefits and state pension arrangements;

. analysing specific personal needs and appetite for risk and recommending action, including the purchase of particular products if appropriate. This includes advice about the right type of assets for the customer to invest in, and advice on non-savings needs like life cover and annuities;

. choosing the right saving scheme provider, based on the adviser's knowledge and experience of available products, company service quality and other measures like financial strength;

. arranging a purchase; and

. regularly reviewing personal circumstances, tax changes, and product performance.

Levels of financial capability are very low in the UK, and many people find it hard or impossible to specify exactly what their needs are, or to identify solutions. Broadening access to advice has therefore been a priority for policy-makers and the savings industry for many years.

How Financial Advice is Paid For

Depending on whether they are tied, independent or multi-tied, financial advisers in the UK have four main types of income:

. annual salaries;

. bonuses - often related to the level of product sales, but increasingly reflecting customer retention and service quality;

. commission paid by a company for the sale and persistency of one of their products; and

. fees paid by customers.

As in many other countries, commission is the main way in which financial advice is paid for in the UK.

Of savings products sold by Independent Financial Advisers (IFAs), over 90% of single-premium and 80% of regular premium business, attract commission. Only ~12% of the total turnover of IFAs is provided by fees.

Nonetheless, >70% of IFAs receive some income in the form of fees, and this proportion is rising. And for those IFAs who do receive some fee income, fees account for nearly 20% of their turnover. The proportion rises sharply when the customer is an employer setting up a pension for their workforce.

For advisers who are "tied" to particular savings companies, advice is paid for in a variety of ways. On average, 70% of a tied adviser's pay is salary. As a broad generalisation, staff in bank branches tend to have a relatively high share of their income provided by salary, while company sales forces and representatives are paid for in a number of different ways.