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A leap of faith

The sins of commission have unfairly earned a bad name for IFAs and may have deterred consumers from seeking their advice

Should I choose an adviser who charges fees or who is paid by commission? I hear so much about the need to get independent financial advice but can an adviser who receives commission be truly independent?

In my opinion, the answer to your second question is yes, there is real and substantial evidence that advisers who are paid commission can be truly independent and unbiased.

However, I can understand why this requires something of a leap of faith for consumers to accept. It would be naive to imagine that some advisers do not simply sell products which pay commission rather than more suitable non-commission-paying products. But many commission-based IFAs also recommend products that do not pay commission, such as deposit accounts and products from National Savings & Investments.

Some industry commentators argue that many of the so-called misselling problems of the past can be attributed directly to the payment of commission but the more informed person knows that it is much more complicated than this.

All advisers need to be paid. It would be a very strange business model that could be run without any remuneration coming into it. IFA firms are not charities although many of them carry out multiple acts of pro bono work for their clients.

I would advise you to talk to more than one adviser as there is no monopoly on best advice. Try to get a referral from someone you know who has had a positive experience of dealing with an IFA. Getting a referral is often better than spending ages shopping around from directories and the like.

You need to decide what it is you want from an adviser before you choose one. Many people approach advisers with little more than a rough view of what they want. “I want to sort out my pension” or “I have some capital to invest. What should I do with it?” You will benefit far more from an IFA’s services if you prepare in advance.

Make sure you go armed with plenty of questions about the IFA’s experience, qualifications and areas of expertise and be prepared to ask for testimonials from existing clients.

You will be inundated with bits of paper at the start of the process but do not be put off by this. You will be given key facts documents by the adviser that will confirm their regulatory status and explain their scope of activities.

I am sorry to say that this part can be very confusing these days because there is a multitude of different types of adviser.

It used to be much simpler for the consumer when advisers were either independent or tied. Now there are hybrid advisers, which is bound to cause confusion.

If the IFA is commission-based, they will give you a menu that shows how the level of commission they receive differs from the average in the market across a range of financial products. To be independent advisers, they also have to give you the choice to pay fees.

Do you just want advice or do you want to buy a product? If you are not sure exactly what you want, I recommend that you speak to an adviser who will charge you a fee to help you identify your priorities.

The adviser may charge an hourly rate to do this or perhaps a project fee to collate together and analyse all your existing arrangements.

They will then probably prepare a report for you and sit down with you to explain its contents. If you then need to buy or rearrange a product to satisfy your requirements, they may well be able to help you do that.

In any event, these days you will know in advance how much commission, if any, the adviser is going to be paid before you sign up for any financial product. Some fee-charging advisers will offset any commission payable on a product against the fee they charge.

Remember that in these modern times, commission belongs to you, the consumer, and you choose whether or not to use it to pay for the adviser’s services. But remember also that there really is no such a thing as free advice. You will have to pay for it one way or the other.

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