Financial advice explained Financial advice: how you'll be charged
In the past, most financial advisers were paid through commission from product providers. It is widely accepted that this acted as an incentive to recommend certain types of products.
From January 1 2013, commission payments have been banned under legislation called the Retail Distribution Review (RDR). The commission ban applies to investment products and pensions, but not to protection products and mortgage sales.
Banks, financial advisers, wealth managers and product providers have all been affected, and now have to disclose charges to clients upfront and charge directly for their services. Commission can still be accepted if the adviser recommended the products before 30 December 2012.
Why has commission been banned for financial advice?
With advisers collecting commission payments from providers they have recommended, they could have been biased towards recommending those providers that paid high rates.
With commission, there was also a danger that customers paid more than they realised for advice, because the actual cost wasn't clear. Some even thought that advice was free because they weren't paying an explicit fee for it.
The fee-based charges that are now the norm are seen as more transparent.
How advisers have to charge you for financial advice
Financial advisers will now have to agree upfront how much you will be charged for their services, when you'll be charged and how payments will be made to your adviser. There are three main ways you will be charged.
- Flat fees – a one-off charge that covers everything from the fact find to the plan implementation. Tailored to your needs but could vary wildly from adviser to adviser. You could be charged an initial fee for the recommendations and then a flat fee annually for reviews or each piece of work your adviser undertakes
- Hourly fees – simple and easily evidenced, but beware, as this method may be less of an incentive for the adviser to work quickly. You could expect to pay anything between £50 to £250 an hour.
- Proportion of the money you want to invest – a percentage of your assets. You could be charged an initial fee, ranging between 1% to 3%, and an ongoing charge between 0.25% and 1%. Note that if you have a smaller amount to invest, an adviser who uses this method of charging might be reluctant to take you on, as they might feel the amount of revenue they would generate might not justify the cost of offering you their service.
What is 'trail' commission on old investments?
'Trail' is the ongoing commission that advisers used to receive from your investment funds.
Advisers can still receive trail commission if the advice was given before 1 January 2013. Trail can also still be charged if you move to another adviser, as long as the adviser discloses the amount of trail to you immediately. However, if your adviser switches you to a new investment, or recommends increased contributions to your investments, you will have to pay an explicit fee.
If you suspect you are still invested in funds that pay trail commission, it would make sense to ask your adviser to review your portfolio.
- Call The Which? Money Helpline – for expert help on finding an adviser
- How to complain about financial services – if you think you've received poor advice
- The Which? portfolios tool - get the right mix of investments for your financial goals
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