What you need to find out about charges when selecting an IFA
In “Advisers face questions over who pulls the strings” (FT Money, 5th May), Elaine Moore reports that it is now very difficult for consumers to select an IFA based on how they charge. Correct. ‘Fee-only’ superficially holds out the best hope of avoiding bias, but it wastes an adviser’s ability to game the commission system for the benefit if their client. It is also often a sign that the firm is predominantly a financial planner and cannot or should not be managing investment portfolios.
Commissions are most likely to be associated with bias. But the area in between, called ‘fee-based’, in which a schedule-based fee is offset by setting commissions received against it (as the article explains), is a grey area.
I have covered the unholy trinity of commissions, biases and irrational costs in many previous articles. These are cross-referenced in the topical headings at right or may be found using the search facility. In many cases, the best generic products (or the most cost-effective terms for those products) do not pay a commission. If a fee-based adviser cannot make a fee option stick, it means they will have to advise sub-optimal commission-paying products in order to make their business model work – in which case there is no gain from so-called independence. If you are a smart customer, you value independence enough to get out your cheque book. But to get it out for the right firm, you need to be sure the fee-based firm has enough customers paying fees to make an offset model work without bias. The conversations you need are therefore about how their customers actually pay, and the scale of their business in non-commission products, not just how they charge.