There has been much written about financial advisor fees and commissions and there will be a lot more over the next 12 months.
From 1 January 2013 the way in which financial advisors can charge will change. I have suggested myself that I think a lot of advisers will be increasing their charges in the next few months, if they have not already done so.
To remind you, from 1 January 2013 financial advisers will have to agree with you the amount they will charge for the advice you receive. In the early 1980’s financial advisers could charge commissions without even telling you, then they had to tell you about it, then they had to make it clear in your advice documents, and now they have to agree the charge with you. So basically, this latest step is a higher level of disclosure than we have had before.
It does seem a little obvious to want to tell someone what they are going to pay for their advice before they begin. But that may just be how I think. Most financial advisers still work on a commission basis. I think providing advice that is completely free of commission, and the bias that can come from that, makes everyone at ease with the whole advice process.
I think when you charge a fee for what you do and this is paid in advance of the work being done, then there is a feeling of contentment on the part of both client and adviser. The client is happier to share information free from the concerns of being sold products they never want, and the adviser can relax knowing they have been paid for the advice they are going to give. No amount of product recommendations will affect the advice they then provide the client with. Surely that is just a really simple and effective way of working.
Paying for advice via commissions is almost the complete opposite in my opinion. The adviser is uncertain about whether the client will go ahead with the advice, and in which case the adviser might never get paid. Because of that do they then try to minimise the time taken to make these recommendations? Or do they take more time in the hope they will be more convincing? That is not an easy position to be in. What about you as the client? Do you let yourself go and reveal all of your personal information knowing you are providing more ammunition for the adviser to sell more products so they can make more commission?
For me the bottom line is that through commissions the adviser only gets paid when they sell something. Through fees the adviser gets paid for giving you advice. It really is as simple as that!