How to pay for financial advice

How you pay for financial advice overseas can vary greatly as regulatory standards differ around the world. Financial advice generally comes in two forms, fee-based and commission-based, with the latter being where opacity can exist.

If you've ever made a purchase and been disappointed by the after-sales support, the same can apply to financial services. Commission-based advice can place restrictions on investments so if circumstances change, making adjustments could prove costly.

Commission-based advice

This style of advice rewards advisors for selling financial products. Selling funds and packaged investments can be very lucrative for advisors and it is not always required to disclose what the rewards are.   

The inherent problem with commission-based advice is not knowing if products are for benefit of the customer or the advisor. In most industries, you pay when work is completed, however, commission-based advice can generate huge upfront commissions for advisors before you've received any ongoing guidance. Sales are not correlated to results either, leaving you at the mercy of a product's pedigree and the integrity of the advisor.

Commission is generated by higher fund charges or applying penalties for withdrawals. Early closure of packaged investments may incur costs as commission is paid upfront and is recovered by exit fees.

Many offshore lump-sum products pay upfront commission of 7%-8%. When combined with the sale of funds paying up to 4%, commissions can rise in excess of 13% meaning an investment of £100,000 can pay £13,000 at the outset. As a result, there is little motivation to manage investments prudently, often leaving customers disappointed.

Fee-based advice

Using a fee-based advisor means you pay-as-you-go for the service you receive. You retain control of the relationship and if the service is inadequate or not what you were promised, you have the power to make changes.

After the introduction of the retail distribution review (RDR), UK advisors had to provide clarity on charges and abandon commission-based sales. Initial set-up and ongoing fees now apply ranging between 0.5% to 1.5% per annum. In less developed markets however, RDR type legislation is still years away and standards are not guaranteed. 

Fee-based strategies are more flexible, client-focused and provide an income for advisors correlated to asset values. The likelihood of prudent, quantitative advice increases because without it, customers can go elsewhere taking the income they provide with them. Using higher quality products produces better outcomes and improves relationships between client and advisor, as both interests are aligned. 

What to look out for

Cold calls - If you receive an unsolicited call, be wary. Many firms still find clients this way, offering a financial review but only offer commission-paying products, ultimately at the investor's expense.  

Lock-in periods - If investments have fixed terms to complete or incur penalties for withdrawals. avoid them. These products generate commission and inhibit flexibility, so if the product charges are difficult to understand, don't make a commitment. 

Insurance-based products - The offshore market is awash with insurance-wrapped packaged investments. The products are infamous for being expensive, inflexible and should be avoided unless used on a fee-basis. Low entry levels make them attractive, but high charges and lock-in periods erode the possibility of making good returns. Withdrawing money is usually when their prohibitive nature is realised and by then, it's too late to reverse your decision. A fee-based advisor will ensure there are no investment restrictions.             

Ask how your advisor gets paid - If the answer is 'by the financial institution' then you could be paying undisclosed commissions. Regardless of your experience or knowledge, remember that simplicity rules with investment charges.

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