March 11, 2011 6:16 pm

Commission surges before ban

Consumers are being warned to check the quality of the financial advice they receive as new warnings about potential misselling emerge.

Some financial advisers are being accused of overselling products with high commissions before the practice is banned in 2013, and even some of those taking fees for advice are suspected of buying and selling, or “churning”, funds too much – to justify charging more.

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More financial advisers charged commission in 2010 than in the previous year in spite of the upcoming ban, leading to fears that advisers are selling products with high commissions while they still can.

A survey of 501 advisers by Defaqto, the analyst, found that the proportion of advisers charging commission rose to 15 per cent in 2010, up from 12 per cent in 2009. The proportion of fee-based advisers rose only slightly to 7 per cent last year from 4 per cent.

But there are also accusations that fee-based advisers could be overmanaging people’s investments to justify their charges.

“I think that we are going from a commission bias to a fee bias,” said John Blackmore, a commission-based adviser, who said he had seen evidence of advisers constantly reviewing portfolios in order to charge for high fees.

“Investors could be advised to change an existing portfolio rather than leaving it as it is,” said Patrick Connolly at AWD Chase de Vere.

The Financial Services Authority (FSA) said that it would be monitoring firms carefully for any sign of either fee or commission churning. Consumers are being warned to ask why they are being advised to buy products paying high levels of commission and also check that they are not being advised to buy and sell funds too often.

The warnings surfaced as Hector Sants, chief executive of the FSA, was questioned on the commission ban, part of the Retail Distribution Review (RDR), by the Treasury select committee this week.

Critics argue that the RDR will lead to higher fees and create an “advice gap” where the majority of consumers will not be able to afford advice.

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