What impact does commission have on my investments?
“I have been with my financial adviser for 12 years, and many of my investments have been made on a commission basis. However, her company is described as a ‘provider of independent financial advice’ and I have no idea if that means she also advises on a fee basis. What are the differences between independent financial advisers and whole-of-market advisers, and what impact does paying commission have on my investments?”
Ask the Professionals: Joanne Roberts, director at online IFA needanadviser.com, says:
The difference between whole-of-market and independent financial advisers is that the latter are the only type of advisers that offer a variety of payment options. The IFA can either charge the client a fee, take commission from a provider whose products they sell, or a combination of the two. Although whole-of-market advisers share the same characteristics as IFAs (that is, they sell products from any provider on the market), they operate on a commission-only basis.
Once an IFA knows what you want them to do, they’ll tell you how much it will cost in terms of their time. You could then write a cheque (for example, for £100) once your dealings are concluded. Alternatively, you could allow them to take £100 worth of commission from any policy or investment you take out.
However, advisers that only work on commission cannot call themselves independent. This is because while some people are happy for their IFA to earn a commission (as it means they don’t have to pay a fee), there is always the concern that some advisers will factor the commission into the advice process.
This difference is made clearer when it comes to investments. If you had £10,000 to invest, and chose an insurance investment bond, the insurance company might pay 5% in commission, or £500, to the adviser. If, at the last minute, you decided to invest £20,000, the commission would then increase to £1,000. The adviser would effectively be paid double for doing the same work – the same application form, written report and amount of time to process your investment.
Issued by life companies and designed to produce medium- to long-term capital growth, but can also be used to pay income. The minimum investment is typically £5,000 or £10,000 and your money is invested in the life company’s investment funds, so the bond can either be unit-linked or with-profits. They offer a number of tax advantages, such as the ability to withdraw up to 5% of the original investment amount each year without any immediate income tax liability. Also, a number of charges and fees apply, such as allocation rates, initial charges, annual charges and cash-in charges. As investment bonds are technically single-premium life insurance policies, they also include a small amount of life assurance and, on death, will pay out slightly more than the value of the fund.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.