Commissions are still alive and well in the Financial Advice industry and heavily defended by most financial advisors. Internationally, there has been a trend by regulators towards banning or severely limiting commissions (UK, Netherlands, Australia etc). It is also likely that new legislation recently introduced across Europe, will recommend banning or restricting commissions.
So what is the problem with commissions?
It all comes down to disclosure. Commissions are not necessarily bad, but the lack of disclosure around their impact on your bottom line is bad. There are common myths out there about commissions which I will lay out here
Myth 1 – Commissions are not paid by the client, but by the Product Provider
I often hear clients saying their advisor told them that commissions were being paid out of the product provider ‘marketing budget’. This is rubbish! Commissions are built into the overall costs of the contract or policy. There are plenty of products now being promoted in the market, in advance of commission bans, which do not pay commission. They can be used as a very good cross-reference when examining the cost of commissions. The reduction in fees can be as high as 50%. With Life Assurance, the monthly premium is reduced by up to 30% when commission is waived. This is for the life of the policy, not just the first year! Typically, a ‘nil commission’ investment or pension contract will have a significantly lower annual management fee and/or no early encashment penalties.
Recommendation – Always ask your advisor for a ‘Nil Commission’ quote alongside your proposed quote so you can compare and assess the value being offered by your advisor.
Myth 2 – You always have to pay your advisor a percentage of assets.
It is common in the investment and financial advice industry to charge a percentage of your fund value for implementation and ongoing service advice. This is typically 0.50% in Ireland. For smaller amounts this can be a very low actual fee (e.g – €10,000 investment would incur an annual fee of €50). However, for larger amounts the fee can be significantly higher (€1,000,000 would incur an implementation fee of €10,000 annual fees of €5,000). There is often no more work involved in setting up a €500,000 investment Vs a €1,000,000 investment, so why should the fee be doubled!! Yes, there might be some additional responsibility for the advisor, but this doesn’t justify doubling the fee.
Recommendation – Agree an actual fee with your advisor for implementation and ongoing service, rather than a flat percentage. It can make sense to pay this fee out of your assets (Pensions in particular), but by agreeing an actual fee you can assess the value being offered by your advisor on an annual basis.