During the summer of 2009, the United Kingdom Financial Services Authority proposed to ban all commissions on investment products. Since then, here’s been a growing movement in Britain to align investment advisers advice with their pocketbooks.
Specifically, The U.K.’s Financial Service Authority proposed the following changes:
(1) to ban commissions paid to financial advisers by product providers to eliminate the potential conflict of interest, moving to a fee-based compensation system for financial advice;
(2) to raise professional standards by requiring all financial advisors to deepen their product knowledge and pass exams;(3) to distinguish between advisors making recommendations based on unbiased review of the market and those who are limited to sell the products manufactured by a single product provider.
Britain has recognized that there’s a real conflict of interest when a financial advisor steers you toward an investment product that nets them high sales commission. In the United States, salespersons that sell you a variable annuity can earn commissions of approximately 10% of the investment, whereas when they sell you an index fund, their commissions are almost nothing.
By eliminating these commissions, investment advisers will be incentivized to help their customers instead of being incentivized to sell the highest commission products.
The new changes that Britain is proposing will affect all areas of the financial services industry in the U.K. including all investment firms, banks, insurers, wealth managers and financial advisors. Final rules are expected by 2010 and will likely come into effect in 2012.
In the United States, no similar move has been proposed. Instead, many suggest using only fee-only financial advisors that do not earn a commission based of any investments they sell you. Rather, they make money by charging you a flat fee for their services. To find a fee-only financial planner near you visit the National Association of Personal Financial Advisors.
