Financial advisors may get paid by:
- Salary (where your advisor is employed by a financial services firm)
- Commission or sales incentive (where your advisor receives payment or bonus from the financial services firm whose product they sell)
- Fees (where you pay your advisor directly)
- A mixture of these types of payments.
No matter which type of financial advisor you use, financial advice is not free. Even where you don’t pay a fee directly, the cost of the product you buy will generally include the cost of commission or a contribution to salaries, or both.
Ask your advisor to explain what you are paying for. If you are getting investment advice, ask your advisor 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 advisor, they must give you their ‘Terms of Business’, which sets out their direct charges – this does not include any commission they receive from firms.
When you buy a product from a financial advisor, they may receive a commission or sales incentive from the financial services firm 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 advisor, commission is more important as it can impact on the value of your investment or pension. An advisor may have one, or a combination, of the following types of commissions:
- Initial commission – this is a percentage of your investment that your advisor 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 may include additional trail commission
How might commission affect you?
An advisor may get more commission from one financial services firm than another. So, they may benefit more if you buy that firm’s product over another that could be just as good, or better. However, a regulated financial advisor must act in your best interest. They must make sure the product or service they recommend or offer 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 as well as getting verbal confirmation. If you are not satisfied that the advice they give, or the product they recommend is in your best interest, ask them to explain it in more detail.
When you buy general insurance products, the commission your advisor 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 direct from an insurance company, the premium could still be the same as if you buy through an advisor. In that case the commission has no affect on the end cost to you.
With investment and pension products, commission has more of an impact. You pay product charges to the financial services firm that provides your investment or pension. These charges cover overall investment management costs and commission. The financial services firm takes these charges direct 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.
How can you get best value?
A financial advisor who can shop around among a number of firms can often get a better deal for you than you could get yourself. Many of these advisors may also be prepared to negotiate fees and commissions, especially if you are making a large investment or pension contribution.
They may be prepared to:
- Quote you a flat fee and pass on to you the value of some, or all, of the commission they receive or
- Accept less commission, so that more of your money can be invested. For example, 1% less commission may result in 1% more of your money being invested
In the case of an advisor who is tied to one provider, 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 terms.
Bear in mind that some financial services firms do not sell their products through advisors. These firms may offer lower product charges as they do not have to pay commission. Your financial advisor may not be in a position to give advice on or recommend these products to you.
You may sometimes be able to get better value if you buy a product direct from a financial services firm without going through a financial advisor. But, you need to consider carefully how important you feel it is to get advice to suit your needs as well as an ongoing service.