Although the world didn’t end back in December as predicted, it did spark an end to the financial world as we know it. The end of December saw the end of commission and a replacement with fees; the perfect solution to a long standing problem according to some! But in many instances possibly just a change in name? The following questions outline the key issues that we feel clients may have.
I appointed a financial adviser last year. What does this mean for me?
For existing and new clients there should be not too much of a change. The basic difference between a fee and a commission is with whom the contract is made. Previously the agreement to pay commission was between the provider and the financial advisor. A fee is an agreement between the financial adviser and the client. The client can choose to pay the fee either directly to the adviser, or if the provider allows it, from money held inside the product.
Have I been disadvantaged by paying commission in the past?
In all likelihood, ‘no’. There are often concerns raised by the media that clients have been disadvantaged by ‘commission hungry salespeople’. The reality is that nothing in life is free. If no commission had been charged then you would have received no advice or help with your financial arrangements, unless you had paid your adviser in an alternative manner. However, undoubtedly in some cases the payment of commission was not completely transparent and had you been properly aware, you may have felt that the amount paid was excessive.
Will I be getting a better deal now that I pay a fee?
In some cases, ‘yes’. Under the new rules the fee has to be agreed between the adviser and the client. It would be very difficult for an adviser to disguise the amount and so clients should be in a better position to judge the appropriateness of the charge. Regrettably the cost of providing advice is increasing year by year, often due to the regulatory burden. Clients frequently do not realise the complexity of the process and the responsibility that an adviser takes on in relation to the advice provided. This may mean that the client and adviser do not always see eye to eye with the level of fee being charged.
How can I reduce the charge for advice?
As has always been the case, everybody is able to shop around to find the ‘best deal’ but what does this mean in reality?
The first issue to consider is whether you require advice or simply to buy a product. Clearly buying a product, for example from an execution only on-line broker, may be cheaper than if you are seeking advice. However who takes responsibility for this? Are you arranging the plan in the most tax efficient way? Do you understand the risks associated with the product? Have you arranged the appropriate level of cover? Should the product be in trust? These are a few of the multiple issues an adviser would consider.
AEON provides advice 99% of the time and remains responsible and liable for that advice, meaning that you have full recourse to us in the event that the advice was inappropriate.
The majority of our clients are introduced to us by existing clients and other professionals. The reason for this is that those people have experienced the added value we have given them in the past. We are not the cheapest source of advice but clients value the advice and service provided. By shopping around you may get cheaper advice but is this at the cost of the service and professionalism you are seeking?
AEON is a Chartered Firm comprising a highly qualified and experienced team of advisers with a supporting administrative team. We will never be able to compete on cost with a one-man band operating from his garage and nor would we wish to. However we believe the rates charged are fair and reasonable.
What about ‘trail commission’?
Historically a lot of investment and pension contracts were set up on the basis that the adviser would continue to receive an income from them based on a stated percentage of the on-going value of those plans (known as ‘trail commission’). This percentage was typically set at a rate of between 0.5% and 1% p.a.
Generally this was considered to be payment for the provision of on-going advice in respect of those contracts but frequently no such advice has been provided leading to media accusations that client’s investments were being plundered by ‘rip-off financial advisers’. The FCA has had great concerns about this and part of the recent regulatory shake up has been with the intention of removing this facility. Regrettably the mechanisms by which changes have been implemented are hugely complicated with many unforeseen and sometimes undesirable consequences. One such consequence is that for existing contracts payment of that ‘trail commission’ can continue to be deducted from your investments as long as no further advice is provided! Conversely if your adviser does advise you, payment of that commission will no longer be received but may still be charged and retained by the product provider. In such circumstances the individual is now paying a charge which is not available to pay for on-going advice!
The situation with new contracts that are arranged after 1st January 2013 is more straight-forward and an ‘on-going charge’ may still be attached to your policy but this may subsequently be cancelled and will then reduce the charge on the contract.
AEON believes it is vital for people who own investments, that on-going advice is maintained. Buying an investment is like buying a car; it requires regular servicing to ensure it remains in good order. In some instances AEON continues to receive a percentage of the value of the investment, but we believe this could be unfair, especially for higher value contracts. We have therefore introduced an alternative fixed price service structure which may save clients with larger fund sizes substantial amounts of money. To see how this may benefit you, have a look at the trail buster calculator on our website.
If we can’t save you any money immediately it may still be worthwhile exploring our services in more detail. Simply book in to see one of our advisers for an initial meeting, which is free and without obligation and we can discuss how we may be able to help you.
What are your thoughts? Let us know using the comments facility below.