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Weekend reading: Death to commission edition

Weekend reading: Death to commission edition post image

Some interesting financial and investing posts I ran across this week, plus a few decent articles from the newspapers.

This week saw the end to a shibboleth that everyone knew was rotten but nobody ever really believed would leave us.

No, not poor Michael Jackson, an amazing singer and a much-maligned weirdo who seems to have been slandered just for being different. The second album I ever bought was Jackson’s rather weak Bad, but to this day I have to dance when his proper classics – Billie Jean, Thriller, Off the Wall – hit the speakers at a wedding.

I’m actually referring to the FSA’s decision here in the UK to finally ban commission paid to supposedly independent financial advisers.

For decades, advisers have been able to recommend investment bonds or life assurance policies to clients then pick up a 5-10% commission from the financial company behind it, dressed up to the client as a cost of investing.

Even worse have been trail commissions whereby advisers have enjoyed 1% of a client’s return on an investment they sold them for decades. Talk about passive income!

Most people never knew they were paying such fees, or if they did they didn’t understand their impact. Even today, I imagine few realize when their pensions are less than they expected or their endowment mortgage fails to pay for their house just how much of their wealth actually went to their adviser.

So three cheers for the FSA for finally banning it. We can only wonder why it took so long?

From the money and investing blogs

  • The Psy-Fi Blog warns of the dangers of toxic ETFs.

Generally UK-related articles from other websites and papers

  • Vintage wines from the 1980s have returned about 12% a year, says The Guardian.

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{ 6 comments… add one }
  • 1 ObliviousInvestor June 27, 2009, 12:25 pm

    Wow! Being in the U.S. I’m was unaware of such legislation.

    But that’s fantastic for investors. If only we could follow your lead…

  • 2 Graeme Pietersz June 28, 2009, 1:21 am

    My reaction was exactly the same (see my recent post). You make a very good point about most people not knowing about trail commissions – I suspect many people also do not realise how large the initial commissions are either

    No-one other than the FSA and IFAs actually seems to have thought this was a good idea.

  • 3 The Investor June 30, 2009, 12:12 am

    Indeed. I think commissions are a relic of a more deferential era, when people just did what they were told and believed ‘professionals’ would do what was best for them. It’s easy to forget how much the world has changed in the past 20 years.

  • 4 Rob June 30, 2009, 9:51 pm

    The FSA document fails to address the huge issue of how commission via platforms will be dealt with. When I phoned and queried this they said they would get back to me.
    What the proposals will do is remove lots of small IFAs from business leaving the industry even more concentrated in the hands of the banks and the networks who are, IMHO, far worse than the small local IFA because they just sell what they are told.
    The proposals do not deal with other incentives, such as corporate outings for IFAs and training courses. These should be disclosed by the agent so that clients can see what influences have been at work.

  • 5 The Investor July 1, 2009, 9:26 am

    Thanks for sharing that Rob. Please do come back and let us know what the FSA says.

    Congratulations on the recent outperformance of the Fund, too.

  • 6 Rob July 1, 2009, 8:15 pm

    The FSA did call back.
    It seems that it is content for the main platforms to continue as they are, taking a share of the amc. It argues that because platforms don’t offer advice there is no problem in that.
    Ideally though it would prefer all platforms to migrate to the Transact model where there is a cash pool and the platform takes its fees from that on the basis agreed with the adviser.
    This issue could be a major stumbling block because unless a fund is on one of the major platforms used by the networks no one buys it.
    Transact is OK, but most ordinary IFAs don’t use it.

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