During your first consultation, a potential adviser should give you clear information about what services you’re being offered and give you an indication of what you will have to pay for it. This will enable you to compare the cost of financial advice and shop around for the adviser who is best value for money.
Your adviser will explain the above by giving you two keyfacts documents concerning:
Services: This document explains the type of advice you are being
offered and the range of products offered.
Costs: This list explains the different ways you can pay for the advice you receive. It also gives an indication of the fees or commission you may have to pay. If you pay by commission, it shows you how this compares to the average market commission
The new advice regime (introduced in December 2004) makes it easier to understand what you have to pay. You must be given a menu of charges from the adviser when you first seek advice. This will enable you to compare the cost of advice and to shop around for a better service.
There are three main ways of paying for advice, explained in the following sections.
Forking out a fee
Fees are either charged by the hour or as a set price for the whole job. This is known as fees-only advice and is the most expensive option, with fees costing anything from £75 to £250 an hour (depending on your location and how experienced your adviser is). You may get the first half-hour free; the initial meeting is often an introductory session where you simply get to know one another better and figure out whether you are happy to work with the adviser.
You have to pay a fee even if you don’t end up taking out a financial product. This isn’t the case if you pay by commission.
If you do pay an hourly fee, make sure you get a rough idea of how many hours’ work is required and how much the total cost is likely to be. Ask your adviser for an estimate of how much he might charge you. You can also request that he doesn’t exceed a given amount without checking with you first.
If you use an IFA, you can choose to pay a fee rather than commission. Only an IFA has to offer the choice of payment options. Tied and multi-tied agents don’t have to offer a choice, although they may decide to anyhow.
Going with commission
If you aren’t prepared to pay a fee, or can’t afford to, some advisers charge commission instead – and all IFAs must offer this option. The commission is deducted by the personal finance product provider when you invest money in a product. As well as an initial commission for setting up a plan, you may also be charged an annual commission on top, which is known as trail commission. Check with your adviser whether this applies before signing up.
Combining fees and commission
You don’t have to choose fees or commission – you can have a combination of both. Some product providers pay your adviser commission when you buy a product, which he may pass onto you in one of a number of ways. These include passing on the full value of that commission to you by reducing his fee; reducing the product charges; increasing your investment amount; or refunding the commission to you.
Look for negotiation
Imagine this: A widow deposits £100,000 into her savings account after selling her home and moving somewhere smaller. The bank or building society sees this deposit and offers her a chance to improve her income. Half an hour later, she has been sold whatever the bank is pushing that month for those in her situation. The adviser may have earned as much as 7 per cent in commission. That’s £7,000 for 30 minutes of easy work. Great money! And no investment risks!
Tied agents and those working for big firms rarely negotiate even if you ask. If you’re happy handing out so much of your money for so little work, fine, as long as you’re aware of what you’re doing.
The alternative is to avoid the non-negotiators and either ask for a commission-sharing scheme or pay for services by time, at a pre-agreed hourly rate, and get a 100 per cent rebate of all commissions.
Expect to pay a minimum £75-£100 per hour, so always ask for an estimate of how long the job will take.