Financial advice – the costs involved

No matter which type of adviser you use, financial advice is not free. Financial advisers may get paid by:

  • Salary – where the adviser is employed by a financial services business
  • Commission or sales incentive – where the adviser receives payment or a bonus from the financial services business whose product they sell
  • Fees – where you pay the adviser directly
  • A mixture of these types of payments

Even if you don’t pay a fee directly to a financial adviser, the cost of the product you buy will often include the cost of commission paid to your adviser or a contribution to their salary, or both. Ask your adviser to explain what you are paying for. If you are getting investment advice, ask your adviser if the costs include a review of your investments from time to time or if you must pay for that service separately.

The first time you deal with a financial adviser, they must give you their ‘Terms of Business’, which sets out their direct charges – this does not include any commission they receive from firms.

Commission

When you buy a product through a financial adviser, they may be paid a commission by the financial services business they represent or whose product they have sold. When you buy insurance or protection products, such as motor insurance or life insurance, your premium will include the cost of any commission and you can compare quotes from a range of providers.

If you buy an investment or pension through a financial adviser, commission is more important as it can impact on the value of your investment or pension. An adviser may have one, or a combination, of the following types of commissions:

  • Initial commission – this is a percentage of your investment that your adviser receives as a lump sum when you first buy the product. It is sometimes called the allocation rate
  • Renewal commission – this is a yearly percentage of your regular investment or lump sum
  • Fund-based commission – this is a yearly percentage of the overall value of your investment or pension fund and is sometimes called trail commission

How does commission affect you?

When you buy general insurance products, the commission your adviser receives is usually built into the overall cost of any product. For example, when you buy home or motor insurance the yearly premium usually includes commission. And even if you buy your insurance policy directly from an insurance company, the premium could still be the same as if you buy through an adviser.

With investment and pension products, commission has more of an impact. You pay charges to the financial services business that provides your investment or pension. These charges cover investment management costs and commission.  The financial services business takes these charges directly from your investment or pension contribution, or from your fund. This reduces the amount of your money that is invested or reduces the value of your fund.

An adviser may get more commission from one financial services business than another. So, they may benefit more if you buy a product from that business, instead of one that could be just as good, or better, from another business. However, a regulated financial adviser must act in your best interest. They must make sure the product or service they recommend is suitable for you and they must be able to show you (in writing) why they feel it is suitable for you. Make sure you get a copy of this document. If you are not satisfied that the advice they give, or that the product they recommend is in your best interest, ask them to explain it in more detail.

How can you get the best value?

A financial adviser who deals with a number of businesses can often get a better deal for you than you could get yourself.  Many of these advisers may also be prepared to negotiate fees and commissions, especially if you are making a large investment or pension contribution.

They may also be prepared to:

  • Quote you a flat fee and pass on to you the value of some, or all, of the commission they receive
  • Accept less commission, so that more of your money can be invested.  For example, 1% less commission can result in 1% more of your money being invested

In the case of an adviser who is tied to one business, such as a bank, building society or an agent of an insurance company, their commission arrangements are generally fixed, so you may not have the same flexibility to negotiate.

Bear in mind that some financial services businesses do not sell their products through advisers.  They may charge less as they do not have to pay commission. Your financial adviser may not be in a position to give advice on or recommend these products to you.

You may be able to get better value if you buy a product directly from a financial services business without going through a financial adviser. But, you need to consider how important you feel it is to get advice to suit your needs or if you want to find a financial adviser that you will use more than once, for example, to review your finances regularly.

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