Fees versus commissions
Financial Advisers have historically been paid for their services via commission payments. Commission payments typically originate from the providers of pension, investment and life insurance products on completion of a transaction. These are paid as lump sum payments directly from the product provider to the Financial Adviser without (on the face of it) being deducted from the client’s money. Commission payments can range from 5% to 8% of the value of a client’s plan/policy.
However, the product providers recoup their outlay by way of additional charges to the client’s plan/policy over periods ranging from 5 to 25 years. If the client was to terminate their plan/policy before the end of whatever term applied to their plan/policy, they would find that they would be subject to an early termination penalty which can range from 10 to 60% of the value of their plan /policy.
This has led to a perception that the client is receiving free advice which is as far from the truth as is possible. The commission regime also leaves clients susceptible to Financial Advisers recommending the product that pays the highest rate of commission rather than what may be in the client's best interests.
The UK has led the way in moving away from this method of paying for Financial Adviser advice when it introduced the Retail Distribution Review (RDR) regime from 1st January 2013.
Effectively, this enforced Financial Advisers to set their own schedule of fees and publish them in a written document which must be provided to a client at the outset of a relationship. Fees must now be agreed between adviser and client and the only role a product provider can have is as a conduit to facilitate payments to the adviser. This year has seen these concepts extended into Europe by way of the following:
• The Markets in Financial Adviser Instruments Directive 11 (MiFID II)
• The Packaged Retail Insurance & Investment Products legislation
The advantages to clients in paying for advice by way of a transparent fee are as follows:
• Removes product bias and ensures independence. The fee will be the same regardless of the product/service recommended. The client can be sure that the adviser is not being guided by the highest commission he/she can receive.
• Transparency – The client pays only what is agreed and documented in a client agreement that the client must sign. The legislation detailed above imposes statutory obligations on product providers, asset managers and advisers to provide clients with detailed breakdowns of all fees (and the recipients thereof) pre-transaction, post transaction and where an ongoing service is provided (and charged for) on client request and at least once a year.
Abacus Wealth Management Limited firmly endorses these developments. We offer clients the opportunity to pay for our services by fee or commission in respect of life insurance products only. All other services can only be paid for by fees. In cases where commission is the preferred option, we confirm that the amount we retain will never exceed what we would otherwise charge as a fee. Any commission payment over and above this will either be rebated or used to pay for any of our ongoing services that you may elect to apply for. The most important thing is that whatever the basis of payment, this will be discussed and agreed with you at the outset our relationship and documented in our client agreement before we commence work together.