How should you pay for financial advice?

24th June 2011

It has been a requirement for Independent Financial Advisers (IFAs) to offer clients the option to pay by either commission or a fee for some years. The question “which is best?” stimulates much debate in the adviser community. We believe that the availability of commission can give rise to significant conflicts of interest.

A commission based adviser has to sell you something in order to get paid. This sort of relationship can work when you are purchasing a commodity (e.g. a car or a washing machine), because you are expecting the salesperson to try and sell you something. It is less appropriate when you are expecting to receive unbiased advice.

Even if you do need to arrange a policy or invest money, the availability of commission can result in a lack of transparency about the true cost of advice. You may form the impression that you are receiving free advice, because the adviser is paid by the insurance company/pension provider/investment company.

The thing to remember is that there really is no such thing as a free lunch. It is important to understand that commission is paid by the provider from charges applied to the product you buy. Whether you choose to pay by fee or commission it is you that is footing the bill.

In almost all cases “products” available today through an IFA can be purchased with or without commission. If no commission is taken then the product benefits from lower charges or other improved terms.

The process of engaging a professional adviser should be the same irrespective of the nature of the advice.

  • Specify the advice that you require.
  • Talk to a number of advisers and satisfy yourself that they are properly qualified to provide that advice.
  • Ask each adviser to confirm their understanding of your instructions and provide an estimate of the fee – in writing.
  • Discuss the options that are available for payment of the fee.
  • Be prepared to pay a fee for good quality generic advice, which does not require the sale of a financial product.
  • Retain the adviser that you feel will provide the best value for money, irrespective of the method of payment.

With this clarity around what is required and what it will cost, the decision about the method by which the fee will be paid is made much simpler. Your adviser will explain the alternatives. Sometimes commission works; for example if the cost of arranging a pension investment is paid as commission you are effectively benefiting from tax relief on the fee.

A truly independent adviser will be happy to have these discussions and will be open about the issues.

To find out more about how we can help you to achieve your financial goals and objectives, please get in touch.