Am I better paying my independent Financial Adviser via a fee or commission?

The answer here relates to any financial adviser rather than just an Independent Financial Adviser.

There is a perception in most people's eyes that if they have not actually paid out a cheque for financial advice that they have indeed got it for free. It will undoubtedly be the most expensive free lunch you will ever have purchased.  I'll cover the shocking costs in a moment but firstly, let us remember that the FSA have changed this and within the next couple of years an adviser will only be allowed to be called independent if they charge a fee.

In the meantime consider that when you approach a financial adviser, you expect advice. If a financial adviser is compensated for the 'advice' you are given only by way of selling you a financial product, how can that be good for you from an independence point of view.

I analysed three months of recent work and found that after a review of the prospective clients' needs and aspirations, as well as a two-hour conversation about risk, 38 per cent of customers did not need a product of any shape or form. Interestingly, 41 per cent of those actually needed to stop a policy which had been sold to them through an 'adviser' (the definition of which is: one who gives advice; a fortune teller).

If this is the case most advisers would be giving their advice for free as they would be receiving no commission. There is no way that will happen.   As a consequence, the motivation to either sell a product or even 'churn' one (stop your existing policy and start a new one) is very high.

That covers off the motivation aspect but consider also the actual costs to the customer. A fee based adviser is typically a specialist adviser in that they will be highly specialist in one particular area rather than a generalist. As such the adviser is likely to be able to locate the correct solution very quickly rather than having to research the entire market place whilst charging you for this inefficiency.

Moreover, let's look closely at the actual costs of financial products. I will look at three aspects here: Life insurance, investments and mortgages.

Life insurance: If a 40 year old took out some life cover for £50 per month with commission attached, the total life cover is £328,626. If they had used a fee based independent financial adviser, the total cover would be over a third more at £444,428. (1)

Investment: If you purchased an investment bond via a bank or financial adviser the typical cost would be c10-11% including fees for set up and commission. The vast majority (99%) of what I see is an investment in an investment bond, which is the highest commission paying, but the least tax efficient product you can buy.

If you bought a unit trust or ISA, the typical set up fee is c5.25%, of which an adviser is paid 3% commission. In both these situations a fee based adviser would have no up-front costs and even if they charged you 3% set up fee, the savings to you are colossal.

Most quality investment advisers have access to the best products and unit trusts at virtually zero cost (there is always a creation price of c0.3% on an investment).

It is also quite common practice for an adviser to return every five years and move a product around (churn), thereby generating a new set of charges and commission for themselves which is invariably disguised with something contrived called extra allocation (another practise which will be shortly banned by the FSA).

Mortgages: Today, rates are not competitive and invariably many banks are not paying commission to mortgage advisers. The best rates are often achieved by the customer going direct to the bank some of which do not offer certain mortgages via a financial adviser. A fee based adviser would be charging for his service and would simply direct you to the best lender.

If you have a financial query or would like to see if you are being overcharged call Matt on 01872 222422, e-mail mhigham@wwfp.net

Source:

(1) The exchange

Matt Higham is an Independent Financial Adviser with Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority.  'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.

The above represents the personal opinions of Peter McGahan.

All information is based on our understanding of current tax practices, which are subject to change.
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