If you go to see a financial adviser for investment advice, they can’t be paid by commission from the company whose products they sell. But advisers who recommend some policies, such as life insurance, can receive a commission. Find out more about why financial advisers can’t be paid by commission for investment advice
From 1st January 2013, all financial advisers – whether independent financial advisers (IFA) or not – have had to charge for their work. The rule change meant they were no longer able to receive a commission from the company whose products they recommended.
This change meant:
- You cannot pay your financial adviser by commission for advice about investments and pensions. Instead, the financial adviser has to charge you an hourly rate, a fixed fee or a percentage of the amount of money you invest through them.
SAVVY TIP: One of the big problems with commission is that some products paid a high commission (such as investment bonds, which paid up to 8%). And others – such as investment trusts – paid none. This skewed the market in terms of the products that financial advisers recommended.
- There may be various payment options. You won’t necessarily be forced to hand over a cheque upfront for the advice. You may be able to pay in instalments from the premiums you’re investing. Or the adviser may charge you a percentage of the value of the money you are investing in a fund or pension, for example.
SAVVY TIP: If you pay for your advice by instalments from the money you’re investing, it may sound very similar to the old system where financial advisers could offset the fees they charged by taking commission. However, there is one important difference: under the old system the pension company or investment firm decided how much commission was paid if an adviser recommended. Whereas under the system introduced in January 2013, the client and adviser can decide how much should be deducted from the premiums or money you pay in.
- The change doesn’t apply to existing investments. If you have money that’s already in a pension or invested in an ISA, for example, your financial adviser can continue to receive commission from it.
Who will these changes help?
It depends on who you talk to. Some people passionately believe that banning commission will help consumers, others believe consumers will lose out.
- The way you pay for advice will be much clearer. Louise Oliver of IFAs Piercefield Oliver, interviewed for this article in January 2013, believed the change will mean consumers will get a much better deal. “What this change will bring is simplicity and clarity. Your adviser will have to tell you how much the advice will cost and you’ll have the certainty of knowing there’s no other motive for recommending a particular course of action.”
- Your adviser won’t have to sell you anything to make a living.
- Some people who don’t need much financial advice or who don’t have much money could lose out. Ruth Whitehead of IFAs Ruth Whitehead Associates believes the changes will mean many people won’t have access to independent financial advice. “Those who are worried that they won’t be able to afford an independent financial adviser won’t go and see one.”
SAVVY TIP: Many IFAs say that before the changes in 2013, most clients didn’t like to pay by fee. Only the wealthier clients were happier with this option because, often, it would be cheaper for them.
- There may be room for confusion. Not all products are covered by the rules that took effect in January 2013. For example advisers recommending so-called ‘protection products’, such as life insurance, critical illness insurance and income protection, can still be paid commission.
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