There is an ongoing debate in the U.S. over commission-based and fee-based advisors. Right now, it’s the investor’s choice as to which type of arrangement to go with.
Not so across the pond in the UK where the Financial Services Authority, which regulates advisors, has decided to ban commissions for financial advisory services provided to individual investors effective next year.
With commission payments having been found to be at the heart of scandals in recent years involving the sale of improper or fraudulent investment products to individuals, the FSA says bluntly, “New rules will remove commission bias from the sale of retail investment products.”
The FSA goes on to say that "firms will have to be up front about how much they charge for their services, and no longer hide the cost of their advice behind the cost of a product.” The new policy will apply to the sale of products such as annuities and mutual funds, but not to mortgages or insurance policies.
Under the new rules, advisors will have to charge clients directly for services and inform them precisely what all charges are. “Firms will not be able to accept commissions in return for recommending specific products” to investors.
The new policy is the result of a four-year study of the financial advisory business by the FSA.
In announcing the new rule, the FSA says, “Firms offering independent advice will have to demonstrate that their recommendations are based on a comprehensive and unbiased analysis of the market, and that any product selection is made in their clients’ best interests.”
Further, it cautions, “If a firm chooses to limit their product range to certain investments or strategies, then the services they offer are restricted, and this should be clearly set out for customers.”
The FSA in the UK has a consumer advice panel. Its chairman, Adam Phillips, said, "the FSA has stuck to its guns. At last, the distortion created by commissions will be removed from investment advice.”