Are you paying too much for advice?
IN AN effort to set themselves apart from other independent financial advisers (IFA), the newly established Tressider Tuohy and Partners are bringing attention to an age-old debate: the cost of independent financial advice.
Rather than receive what they call ''extortionate levels of commissions'' from companies whose products they recommend, Tressider Tuohy has decided to introduce fees into its remuneration structure.
At first glance, the idea seems simple. Clients are charged a fee ranging in price from $3,500 to $7,000 to receive a report assessing the client's financial position and giving recommendations for the future.
Upon receiving the report, clients are free to make the arrangements through their own means or through Tressider Tuohy's service, which offers reduced or partially rebated commissions.
In theory the idea sounds attractive - products will be recommended on their merits rather than on the commissions they generate - but in practice the issue is a bit more complicated.
Around the world, the way in which personal financial advisers are remunerated is an ongoing debate.
In the UK, the Office of Fair Trading has recently recommended that IFAs be compelled to disclose commissions on insurance-based products. This recommendation has stemmed from the office's concern that IFAs may be biased in their recommendations due to the varying commissions offered by insurance companies.
At least one UK insurance company, for example, pays nothing into pension plans in the first year due to the high level of commission.
But British IFAs are furious over the disclosure move because agents linked to insurance companies are exempt. The playing field has been tilted, they say.
Although no such regulation is being muted in Hong Kong, the debate over fee-based versus commission-based payment rages, and Tressider Tuohy has decided to capitalise on the issue.
Given the apparent lack of fee-based IFAs, Tressider Tuohy's banner should come as no surprise. Of the over 35 IFAs registered in Hong Kong, most have some sort of commission generated structure in place.
The problem is, commissions will vary enormously depending on the investment house. Barry Lea, regional director of financial services and marketing at Hill Samuel, suggested the norm for commissions on unit trusts would be in the region of three per cent.
But for products offered by UK-based insurance companies the commission can be as high as 140 per cent of the first year's premiums. And the first year's norm for insurance products based locally is somewhere around 60 or 70 per cent, Mr Lea said. Thereafter the rate drops to around five per cent.
Despite the sometimes astronomically high commissions, IFAs defend commission-based structures for a number of reasons. Many of the unit trust houses will charge a fee even if dealt with directly, said Mr Lea.
Miles Standish, managing director of Towry Law International, pointed to a number of additional reasons why commission-based structures were still preferable to fee based.
''Everyone pays for the fee-based [system],'' he said. ''Even people who don't take advice have to pay.'' He also suggested that clients have to pay for ongoing services as well. This means each time the phone is picked up a fee is levied.
But most IFAs are willing to admit that potential problems in commission-based fees exist.
''Some brokers will push the highest-paying commission product above all else,'' said Mr Lea.
This approach can translate into ''the best advice for the adviser, not the best advice for the client'', he said.
According to these advisers, both systems are open to abuse.
''Its not hard to envision a scenario where fee-based companies raised fees more than necessary. At the end of the day, it's integrity,'' said Anthony Farr, managing director of Overseas Financial Services (OFS).
The result has been that several IFAs are beginning to offer what they believe to be a unique cross-breed of the two.
Hill Samuel, for example, pays its employees on a salary basis. Remuneration is not linked to volume of sale, they contend.
Likewise, Towry Law pays a fixed salary plus a bonus. The way in which the bonus is determined is linked to the amount of business brought in, not to the size of the commissions, they said.
Additionally, both companies are willing to offer fee-based services as well, but these must be requested by the client.
Even Tressider Tuohy has to some extent combined the two by offering a fee-based assessment and then a reduced commission service as well.
They also have set up a mortgage company which will benefit from commissions.
But director Pat Tuohy still maintained their approach was unique.
Lower commissions will improve the products offered, he said. Unit trusts offered by the group, for example, will benefit from a lower bid offer spread.
''Every new insurer to the market is simply adding 10 per cent on top of the existing maximum and then throwing some cash at the big direct-sales operations based in the region,'' Mr Tuohy said.
''The end result is products that are now 30 per cent to 40 per cent more expensive than those available two years ago. We've decided we will take the initiative and offer clients lower-charged products for less commission.'' How much the client benefits awaits to be seen as insurance companies are still considering what product enhancements can be made. In the meantime, keeping track of commissions paid to your IFA is a practice outside observers recommend.