The new Central Bank rules on broker commissions is based on a noble cause; to benefit those looking for independent financial advice. Under the new guidelines, brokers and financial advisers will not be able to refer to their services as “independent” if they accept product provider commissions. The new rules are scheduled to come into force on March 31st 2020. Brokers will also be banned from accepting paid-for trips and other perks, including free tickets to sporting events.
In many ways, the new rules reflect similar moves in the UK over the past decade where the objective there was to provide greater advice and service transparency within the broker sector. It is a model that is popular in many countries.
Goals versus reality
Here in Ireland, consumers are generally loathe to pay for advice which is one reason the commission-based service that is currently under the Central Bank spotlight is so popular. In fact, a less-discussed but equally significant factor in the current commission-reliant model in Ireland is as a result of poor levels of financial literacy; consumers, in general do not understand large aspects of financial services or financial advice services. This has been highlighted in a number of reports, including a 2016 study published by MoneyWhizz.
Non-fee beats fee-based service
Even in situations where consumers are presented with a choice between a fee-based service and non-fee (where the broker earns a commission from the product provider), the customer overwhelmingly chooses a non-fee option.
Consumers are confused
One area the independent / commission-dependent split can make a significant difference is in the area of investments, which includes pensions. Here, there is a massive gap in consumer knowledge, especially when it comes to compounding growth. Of significance is the impact tiered-fees can have on the long-term growth of an investment fund. In one case-study, MoneyWhizz presented a range of calculations to a select audience. In one, the customer could choose a non-fee advice model or a fee-based one. At the same time, they were also presented with a range of long-term investment outcomes.
Balk at paying fees
Even in a situation where the fee-based model produced a better outcome, the customers balked when it came to paying the fee, and chose the non-fee option. Their response was that they might be better off enjoying the money in their pocket today. However, what was really at play was a general unease with the entire investment landscape and the financial terminology… half-way through the discussion, the client appeared to labour under a tidal wave of financial language and terminology and when it came to the decision on fees, they chose the non-fee option as it was the only concept they could clearly identify with.
Lead with financial education
More financial education / literacy is needed. MoneyWhizz is the only independent financial education resource operating in Ireland today. It’s services are available in schools and in leading employers. It’s primary objective is to raise the general level of financial literacy in Ireland and to instil greater financial confidence where those seeking advice are equipped to make informed financial decisions.
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