With all the furore surrounding the Pre-Budget Report this week, you could have been forgiven for missing the publication of a report yesterday by the Financial Services Authority.

But this somewhat overlooked report, the Retail Distribution Review, is going to have a dramatic effect on the investment industry.

The sweeping changes it proposes will deal a killer blow to commission-based financial advice. The RDR aims to demolish the existing payment structure, where financial organisations, such as unit trusts and insurance companies, decide on what level of commission to pay advisers for recommending their products, with the advisers then deciding which products to recommend to their clients.

Times Money has long argued that there is a potential conflict of interest within the current set-up, where advisers are acting for their client, but are paid by the product providers.

Now the message appears to have got through to the FSA. Its report proposes that customers and advisers should first agree on the amount and method of payment without any outside interference from product providers. The idea is to move the industry away from the current position, where more than 80 per cent of advisers’ payment comes from commission, towards a more fee-based approach. As Jon Pain, of the FSA, puts it: “This is the end of commission as we know it.”

Commission will not be totally outlawed, but advisers will, in future, have to be crystal clear about what is being paid, and also tell the client that the commission is coming directly out of his or her own pocket. This is designed to put an end to the mistaken belief that commission-based advice is ‘free’ because the client does not physically write out a cheque to the adviser, as is the case with fee-based advice.

The reality is that consumers do, in the end, pay for commission-based advice and one of the best things about the RDR is that its proposals will make this very much clearer. The FSA is to be congratulated on its plans to demolish the investment industry’s rotten and tottering payment structure and replace it with a much more transparent set-up. It is also to be congratulated on making a much clearer separation between the cost of a product and the cost of advice and in demonstrating to consumers the age-old truth that in financial services, as in every other walk of life, there is no such thing as a free lunch.

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