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The holy trail

I have read articles that seem to suggest that my adviser is receiving so-called trail or renewal commission that is costing me a good deal in investment returns. Why should I be paying this and how can I stop this being paid to my adviser?

You are absolutely right that there has been a good deal of media coverage on this subject. I suppose this is often the case when ill-informed people are allowed to pontificate on a subject when they have failed to do the necessary research.

In this case it is, of course, the politicians on the Treasury select committee who have raised the subject as a smokescreen to hide the failings of Government to properly deal with the current savings gap faced by the UK population. They failed to properly establish how such payments impact on the services offered by financial advisers to consumers.

Of course, it may well be that there are consumers who are paying renewal or trail commission to their advisers and getting little in return and there are a number of ways in which you might look at this.

If you were sold a financial product at any time, then it is highly likely that you will have paid certain product charges – after all, only the most naive person would expect to get something for nothing. There is always a price to pay when investing money. The product provider has to market its product and the most cost -efficient way for it to do that is through the IFA market. IFAs have been the best way for products to be distributed to consumers and this is reflected in the increase over time of their market share.

But IFAs are not going to distribute products for free. IFA firms are commercial organisations with costs to pay and profit to be made. Each firm will have a different cost and profit business model and, therefore, is likely to have a different pricing policy.

Some will charge a fee for advice and the assistance they give the consumer in buying a financial product and some will receive a payment in the form of commission. Others will charge a combination of fees and commission. Some will clearly represent better value for money than others.

Regardless of whether they offer advice based on charging a fee, commission or a combination of both, the important thing is that any payments to the IFA will have been disclosed before you signed on the dotted line. Of course, some disclosure methods are more robust than others. Your adviser might have been very upfront with disclosure or you might find that somewhere hidden among many pages of numbers the commission amount is shown.

Returning to the trail or renewal commission issue, you should note that this is also required to be disclosed. What consumers must learn to do is ask the adviser what value-for-money services they are going to get for any trail or renewal commission payable. If the answer is none, you have every right to complain and transfer your business elsewhere. You might transfer to another adviser who provides ongoing service or to a discount broker who will not charge you but reinvest this for your benefit. Be careful, though, as you could jump out of the frying pan into the fire as not all discount brokers rebate all the commission. If, on the other hand, you receive ongoing service for the payment of renewal or trail commission, then you will have less cause for complaint. There are a number of levels at which this ongoing service might be provided and it is between you and your adviser to decide which is most appropriate for you.

Do you want a face-to-face meeting each year to review your plans? If you do, you must appreciate that there is a good deal of cost involved in providing this. You may feel more comfortable with a yearly review provided in writing, perhaps backed up by service over the phone. You may have ad hoc questions you need to ask your adviser throughout the year.

If you are paying fund-based renewal commission, usually about 0.5 per cent of the value of your funds under management, then you will probably receive a more formal review each year. Your adviser will usually offer asset class modelling services and a detailed analysis of the performance of the selected investment funds.

You should check the services you are receiving from your adviser. You may discover that you are getting real value for money. As with all things in life, there is a chance that we all know the price of everything but the value of nothing and this is certainly true of renewal and fund-based commission. DOCE:

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