Let’s invest in going commission-free

The Irish investment market, which is dominated by life companies wrapped up in cosy relationships with investment intermediaries, is crying out to be shaken up. As it stands it does no

The principal problem is commissions. The Irish retail investment market is dominated by hundreds of agents dependent on a handful of big life companies for commissions. Many of these advisers masquerade as “independent” but are in fact tied agents motivated to put their clients into the arms of the investment company that is paying the best commission, be that a lump sum or, more typically, a lump sum with a trailing commission paid out to the broker over five years.

This column has previously discussed the opaque nature of the fees charged by many investment funds, which can double the stated management costs of the fund. The commissions issue is arguably much more acute.

If you are a financial adviser Irish and EU guidelines require that you act in your client’s best interests. It is difficult, however, to put a client into the best investment product if that product is offered by a company that does not pay commissions. It is equally difficult to see how a supposedly independent adviser would not be motivated to select, not the best product for his client, but the one that pays the highest commission.

According to the Central Bank, structured retail products, also known as tracker bonds, typically pay a commission of 2 per cent up front with a trailing commission that could be another 2 per cent of the fund’s value every year. Typically these trailing commissions can last for five years. In that
five-year period is your adviser really likely to suggest that you exit the fund in question? Once that period is up are they going to advise that you stay there or move to another fund so that they can earn a new set of commissions?

The Irish system is supposed to act in the interests of consumers. It doesn’t.

It is not a uniquely Irish problem but we do seem to be behind the curve in dealing with it and there is little optimism that we will catch up any time soon. The UK and the Netherlands, faced with exactly the same issues, reacted by banning commissions on investment products. Canada is considering a ban on payment of commissions on investment products. In the US the Obama administration reacted to the obvious problems in the industry by introducing a “fiduciary rule”, which basically requires advisers to put their clients’ interests first. It was rolled out this year in spite of attempts by the Trump administration to delay its implementation.

In Ireland our Central Bank has initiated a review. As part of it many companies operating in the Irish market made submissions to the Bank. As you would expect many of those were life companies saying everything was fine — no need to change a thing.

There were some notable dissenting voices. The Pensions Council, which advises the government, said that consumers could save themselves as much as 8 per cent of the value of an investment by going to the firm with the lowest charges “if they only knew about it”, but that there was no incentive for intermediaries to offer the cheapest product.

It gets worse. According to the council, firms will offer different versions of exactly the same product with different fees. Intermediaries put clients into the version with the higher fees, and presumably the higher commission, and are not required to disclose this. The word “scandal” comes to mind.

Vanguard, which is one of the largest investment companies in the world with about $3.8 trillion in assets under management, said: “Conflicts can only truly be addressed where the payment of commission by product providers to intermediaries is banned completely”. Banning commissions would be very good for competition. At present in the Irish market life companies only need to compete for brokers, not consumers.

The UK banned commissions in 2014 as part of its Retail Distribution Review. Two years later a review of the ban by the Financial Conduct Authority found that it had made it easier for consumers and advisers to compare platforms, pushing up competition and cutting charges. In research published last year Cazalet Consulting indicated that the changes had reduced annual expenses across the industry from £11 billion in 2012 to £5.4 billion in 2014.

The industry expected our own Central Bank to conclude its review last month. According to the Bank the review will conclude by the end of this month. The signs, for anybody interested in the rights of the consumer, are not good. This year Bernard Sheridan, who was then director of consumer affairs at the Bank, ruled out the possibility of a ban on commissions even before his own review was completed. He said it would be too much of a “shock” to the Irish system. In other words too many Irish intermediaries who have grown fat on opaque and completely unnecessary commissions would go to the wall if forced to asked their clients for an up-front fee; if forced to justify their service to the people who ultimately pay their bill.

The Central Bank has flagged changes that will require advisers calling themselves “independent” not to accept commissions. According to one industry source plans are under way for “independent” firms to rename themselves as “impartial”. Problem solved; gravy train service uninterrupted.

Maybe Mr Sheridan’s successor will revisit the possibility of a ban on commissions, but nobody is holding their breath.

t operate in the interests of consumers and is woefully lacking in competition.