Commission is killing off independent money advice
Regular readers know that this column does not answer readers’ letters (that is in another section) but Connexion asked me if this query provided inspiration: “Do independent brokers have to tell clients the commission they earn on recommendations, as was the case in the UK before it was compulsory to charge fees only? If they don’t have to, will they? Does the amount of potential commission influence recommendations?”
“I don’t expect a ‘frank’ answer,” said the reader.
Inspiration indeed! I will start by being blunt. If commission levels vary from fund to fund/provider to provider, this will naturally influence the advice given. If not by all, at least by some. It follows that any adviser incentivised by this is unlikely to have your best interests at heart.
I did write a (frank) article on how advice is paid for in September 2017. Much has changed.
The article highlighted how France is highly regulated, with significant power over French-regulated (as I am) advisers. The loophole was the EU passport, which allowed advisers from other countries to market their services in France. The tough French rules with low caps on commissions did not apply to them and could be ignored.
We have seen, outside of French regulation, commissions under the guise of “marketing costs” of 1-2%, on top of the 1-2% direct charges.
This meant that commission was rife but EU law was going to change all that, banning all commission from the start of 2018, in the form of MIFID II (article 24.7). In France, that went a little bit wrong, unfortunately.
There was a great deal of lobbying in France to keep these commissions known as “rétrocessions”, and it succeeded in a way which has, in all practicality, meant the death of independent advice in France.
Essentially, those advisers who are not deemed to be “independent” may continue to receive rétrocessions. It appears that, a year later, only a handful of advisers remain independent.
So, by staunchly remaining independent, I have been irking those who are not, including professional associations. Asking French investment providers for “clean” funds, ie. with no commissions, is met with astonishment: “But why, there is no demand for such funds?” This attitude has made the task of proving independence to the regulator challenging.
So back to the reader’s question. It is difficult to know who works how.
If an adviser is using the EU passport and is not directly authorised in France, then anything goes. You are not protected by the law (holding the passport means they are breaking no laws), or by regulation (the home country cannot police advice in another country), or by indemnity insurance (it will not pay on advice given abroad). They may not even be qualified to give the advice, considering your country of residence (the qualification is from another country).
Basically, it is the wild west...
So how do I avoid that?
The best way is to ensure that the adviser is authorised in France (the only regulation that has authority in France). This is easy: check that they are on the Orias website (orias.fr).
Type in the name in the box at the top right of the page and the company or person should show at the bottom of the page. You can click on them for more information.
First, look for the status Conseiller en investissement financier (CIF) and the reassuring AMF logo (AMF is the French regulator). Of vital importance, you should see the name of your adviser next to the status. If not, you might want to ask your adviser why this is.
Confirmation of French regulation means that where commission is applied, it is capped at very low levels. These are levels that the regulator deems reasonable. A French-regulated adviser must declare these commissions in writing, ie. the percentage. In France, this averages around 0.5%.
I have no problem with an adviser charging 0.5%, thus earning 1% per year overall (though it depends what they are offering in terms of service). It is not acceptable where the charge is 1% and another 1% is taken in commission (I have seen higher levels from unregulated advisers).
What the ORIAS website does not tell you is if the adviser is independent or not. When you engage an adviser, they must legally ask you to sign their terms of business, defining their mission, fees and status.
The status must clearly state if they are independent or not. If they declare they are independent, they may not collect commission. If they are not independent, at least you know there is a cap on commissions they receive.
So to the original query – you are now armed with how to check the true price of advice and to know if the answers you get are “frank”.
This column was written by Robert Kent of Kentingtons financial advisers. See www.kentingtons.com