Incentive And Financial Services Commission PaymentsSome recent thinking about the effect that financial services commission payments can have, it seemed a good idea to look at pensions. A difference was hammered home to me a week ago. I was discussing with a client the benefits (or not as it turned out in this case) of a Stakeholder pension. Stakeholder schemes were introduced to offer a good deal to UK resident customers. The charges are transparent and very low and it was thought that this would stimulate pension contributions nationwide. This stimulation does not appear to have happened. Take up of the plans has been low and from all I can tell the contributions into schemes have also been disappointing. Why might this be? I was discussing how high commissions create high sales. Back in those days, there was minimal regulation and an adviser might earn anywhere between £1,000 and £5,000 to sell an endowment (the amount of commission depends upon the length of the policy term, the type of policy and the monthly payment). The paperwork was so minimal that the entire process might take half a day in total. These days, the compliance work involved in a stakeholder pension might take half a day at best. Compliance work is all computerised (with paper copies) and has been designed so as to be correct: there is no wrong! It means that if you make a mistake, you will generally need to delete everything done and start again from scratch. I have once spent two whole days getting the compliance right for just one plan. Make a mistake, crash the computer and before long you will have turned from mild mannered financial advisor into a frustrated, crazed dervish intent on the destruction of a laptop! This particular plan would have been for £100 per month and for a term of perhaps 30 years. Yet the total (gross) commission would have been in the region of just £80. After year two, there would be a 'trail' commission' of around 18 pence per month. That is it! Even worse, after all this work, if the client decides to stop payments in a few months (and with a stakeholder plan this is penalty free) most of the commission will be 'clawed' back. Potentially it could cost the advisor money and time to set up the plan. You didn't realise that financial services was actually a charity did you? Has it now become clear why the pensions shortfall in the UK is so large and growing? As an advisor, given a list of 100 clients to help, stakeholder pension planning would be right at the bottom of my list. It just is not worth either the time, effort or risk. I know it is a dreadful thing to say (and bound to be illegal, unethical or similar) but I believe it - and now I am no longer a UK adviser I can say it too! The financial future of the UK is largely tied to the future liabilites of the government to make pension payments for us in our retirement. Responsibility has been passed to the individual already and the only group of people truly able to make any difference to the mess have no incentive to help at all. I often wonder if this is down to lobbying. Any government makes decisions under advice from those with relevant experience. I would imagine the life assurance industry has some powerful influence when legislation is being discussed. They would have lobbied to ensure stakeholder did not disadvantage them. Consumer groups would have lobbied hard on behalf of the public. The consumer should not be disadvantaged. I just wonder if financial professionals did much lobbying of their own because most of the risk in a stakeholder plan falls on the advisor. Ironically, it is the public that really bears the risk here. You can bet most financial advisors have a pension. They know the score. However, the average chap on the street might not be so aware and if an adviser mentions it only in passing (or not at all) will continue in blissful ignorance not realising that poverty probably awaits his retirement. Will we one day see members of the public sueing financial advisers because, 'He should have forced me to buy a pension'? * This was first published in August 2004 * To read other articles about similar topics, please also visit:
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