How you pay for Financial Advice in France

How you pay for Financial Advice in France

Dec 27, 2023

For English nationals living in France, the landscape of financial advice is facing potential changes, thanks to recent propositions by Mairead McGuinness, the European Commissioner for Financial Services. She proposed reforms to alter the traditional methods of compensating financial advisors, a move that could have far-reaching implications for both consumers and advisors. While the changes will not be implemented this year – thanks to lobbying primarily from France and Germany – the subject is likely to be brought back to the table in three years’ time. So what does this mean, and how you pay for financial advice in France?

pay for Financial Advice in France

There is already legislation in place to regulate how advisers are paid in the EU. It is called MIFID II, and it was rolled out in 2018. The aim is to clarify how advisers and financial institutions all over the EU are paid. It places restrictions on inducements paid to investment firms or financial advisors by any third party in relation to services provided to clients. Commission rules already apply to those who are officially deemed as independent. MIFID II, however, allowed those who were not independent to continue taking commissions (France and its many associations campaigned heavily against blocking retrocessions and were key in winning this loophole). The issue, especially in France, is that a vast majority of advisors simply pivoted away from independence and carried on as before. This means that the legacy of MIFID II was negative overall, simply killing off independent advice. The push here is that this new proposal is applied to ALL advice, and so would include non-independent. This may revive the French independent financial industry, as today, true independent advice is exceedingly difficult to find.

So, how do most people pay for financial advice in France today, and how might the proposed changes affect you?

The answer is that most people pay for financial advice in France via inducements (otherwise known as commissions) paid by the funds within your investment, to the financial adviser. For example, the “emerging markets” fund in your portfolio may be charging an annual management fee of 2%, of which 1% is paid to the adviser. The problem is that management fees differ from provider to provider and are somewhat opaque.

Earlier this year Mairead McGuinness put forward a set of propositions designed to regulate and standardize the payment of financial advice across the European Union. The focus of these proposals was to eliminate the practice of inducements provided to financial advisors by product providers for promoting specific financial products to clients.

The main argument in favor of these propositions is that they seek to remove any potential conflicts of interest that may arise when advisors prioritise their financial gains over the best interests of their clients. By removing these inducements, it is envisioned that financial advisors would be better positioned to provide impartial advice tailored to the unique needs and circumstances of their clients.

While proponents support the ban on inducements as a measure to enhance transparency and reinforce consumer trust in the advisory process, detractors present various concerns.

Whilst the client is indirectly paying for the advice already, some opponents argue that banning inducements could result in an increase in the cost of financial advice for consumers. Advisors would no longer receive commissions from financial product providers, so they would have to charge their clients directly, possibly deterring some from seeking professional advice altogether.

Another point of contention relates to the potential impact on smaller advisory firms. Unlike their larger counterparts, smaller firms may not possess comparable resources to smoothly adapt to the new payment structure. Consequently, there is a fear that these firms could face challenges, leading to a reduction in the number of advisors, thereby diminishing competition.

So, what are the potential outcomes, and how do they compare?

To gain a better understanding of the potential outcomes, we can look at the experiences of the UK and Holland, both of which have already implemented similar inducement bans on financial products.

In the UK, the Retail Distribution Review (RDR) was introduced in 2013, prohibiting financial advisors from accepting commissions and requiring them to charge fees for their services directly to clients. While the RDR aimed to enhance transparency and reduce conflicts of interest, it did result in a temporary decline in the number of financial advisors. However, over time, the industry adapted, and consumers gradually became more comfortable with the fee-based model. As a result, the quality of advice improved, and investors gained more confidence in the financial advice they received.

Holland also introduced a ban on commissions for financial products, known as the “Provisions for Services Act” in 2013. Just like their British counterparts, the Dutch faced some initial hiccups. It was like learning to ride a bike all over again, but they pedaled through the obstacles. The advisory industry regained its balance, and people continued to receive sound advice without any questionable backroom deals.

Mairead McGuinness herself also takes the examples of the UK and Holland to put forward her case. She suggests that product costs have fallen in the Netherlands and the UK.

To the argument that people would need a way to access professional financial advice cheaply or for free, McGuinness wrote, “in fact, retail investors already now do pay for advice as a part of the integrated product costs, however, they may not realise it.”

The experiences of the UK and Holland illustrate that while there may be some short-term challenges, a ban on inducements can lead to a more transparent and client-focused financial advisory landscape in the long term. It may take time for everyone to adapt to the new payment models, but at Kentingtons we believe the potential benefits of full transparency of charges and reduced conflicts of interest are significant. That is why Kentingtons already work on a fee only basis.

This article was first published in the Connexion November 2023

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 Disclaimer: The information in the above article concerning taxation is based upon our understanding of the taxation laws and practises in France at the time of writing. These taxation rules are subject to change and as such, Kentingtons cannot be held responsible for any inaccuracies that may occur. The information in this article does not constitute personal advice. Individuals should seek personalised advice in relation to their own situation.

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