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Costs of Financial Advice

It is important to remember that financial advisers offer a professional service. Like accountants and solicitors, financial advisers need to be remunerated in order for them to make a living. Financial advisers must spend a large amount or time researching, documenting and explaining the advice they provide, as well as years of understanding the market and being qualified to give advice. There are a few different ways that a financial adviser can be remunerated.

Traditionally, the most common method of remuneration for financial advisers has been in the form of commission. This commission was paid by the product provider that was recommended by the adviser, which in some cases was perceived to have led to product and provider bias. Different products and providers offered different levels of commission to advisers, which was seen to create a lack of transparency whether advisers were swayed towards higher levels of commission or not.

Following the Retail Distribution Review introduced on 31st December 2012, new legislation means that commission is no longer allowed to be paid to an adviser on any investment related products. It is hoped that this will make financial adviser remuneration more transparent, remove any potential product or provider bias and enhance consumer outcomes. Commission is now only available on some non-investment related products such as life assurance and protection.

Now that financial advisers can no longer be remunerated by commission on investment related advice, advisers still need to be paid for their services through other means. The general idea is for advisers to earn their remuneration through charging fees to their clients for their services. Accountants, solicitors and other professionals charge fees for their services and financial advisers are now expected to do the same.

The amount that an adviser charges a customer could be a set fee for the work that they do using an hourly or daily rate. This fee should be charged whether a customer does or does not decide to act on the advice they have been given. Most advisers are likely to accept a fee payment by cheque for their services on an initial and ongoing basis. Some advisers may charge an annual retainer to their clients for regular review meetings and servicing of their financial requirements.

However, as financial advice often leads to the sale of a financial product, customer fees can often be facilitated through these products rather than additional and separate fees needing to be paid by the customer. For example, if an adviser invests a sum of money into an investment product, then the adviser fee can be taken out of this investment amount rather than being paid separately. The product provider would facilitate this by allocating the reduced amount into the product and pay the agreed fee to the adviser. This remuneration method is regularly used on an initial basis but is often also used on an ongoing basis where an agreed proportion of the investment amount is paid to the adviser on a regular basis for the regular service that their customer receives. It is not uncommon for any investment related advice to cost 3% of the investment amount initially and then 0.5% of the investment amount per annum for ongoing service and reviews. However these amounts can vary depending on the investment amount and the service proposition offered.

Most advisers will provide a free initial consultation and lay out their remuneration structure to you. When you are looking for a financial adviser or when you contact a financial adviser, you should ensure that you are clear on how their charging structure works and whether it is appropriate for your requirements.

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