Financial Advice: Why Paying for It Can Save You Money

For many years, independent financial advisors in the UK have operated on a sales-driven commission model. This has meant that instead of being paid directly by those who came to them for impartial Strategic Financial Management Notes financial advice, they received a commission from the providers of the financial products as a marketing cost, with the advice function being a secondary consequence of the transaction.
While this offered short-term benefits for the cash-strapped consumer looking for financial advice, it brought a host of problems. The most obvious was that financial advisors were incentivised to recommend products that paid them attractive commission – not necessarily those that were right for their clients.
This problem reached its peak with the pensions mis-selling scandal, which saw thousands of people move out of occupational pensions schemes when they would have been better advised to stay put. Although it first came to light many years ago, pensions mis-selling was still a problem as recently as 2008, when unscrupulous financial advisors were found to be encouraging investors to switch their pensions at a total cost of A�43m per year.
As things stand, advisors can take commission when they sell products such as pensions or unit trusts, as well as a ‘trail’ or recurring commission for every year the consumer holds the product. According to the FSA, these commissions amounted to an average of 5.6% of the sum invested. So while financial advice might be ‘free at the point of sale’, it certainly does have an impact on the performance of an investment – and, more importantly, it is clear that the advice given to the consumer can never be truly impartial.
However, there is a different way. Some financial advisors provide their services on a fee basis. In other words, they charge a fee for the advice they provide, rather than taking a commission from any product they provide. This means they receive their remuneration regardless of which products their customer ends up choosing – and even if they decide not to buy any products at all.
Some fee-based financial advisors take their fees as fixed charges – much like other professionals such as solicitors and attorneys do. Others negotiate a fee based on a percentage of the customer’s funds under management, rather like the sales fee charged by some estate agents based on the price of the property sold.
Charging on a fee basis realises a number of important benefits for the client. The most obvious one is that the advisor is not incentivised to recommend a product for which they stand to receive an attractive commission. While most financial advisors will aim to tailor their advice to customers’ needs to some extent, the promise of commission inevitably leads to bias. It can also lead to advisors encouraging customers to make changes to their investments or financial setup when none is required.
With fees, everything is much more transparent. The customer knows exactly what they are paying for their advice, and what they can expect to receive in return.
Some financial advisors already charge this way. However, from 2012, UK financial Best Instant Loans advisors will be forced to charge the consumer directly for their services.

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