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The ongoing rate

I value my financial adviser, but he only seems to get in touch when he has something to sell. I am pretty sure he continues to get paid commission each year from my investments but he does little to justify receiving these payments. The last time I raised this, he argued the money was a deferred reward for the initial work. Does this sound fair?

If you have investments, then part of the annual management charge you pay goes to pay for ongoing commission to the adviser. These payments are often called fund-based commission. The amount of the payment to your adviser will depend on the value of your investment.

Fund-based commission is typically 0.5 per cent of the fund value each year, paid to your adviser either annually or more frequently. It is a direct cost to you, the investor, as, without these payments going to your adviser, the annual management charges could be lower.

As you say, you have no reason to question the quality of his advice but you are a bit peeved at the lack of ongoing service – particularly when you seem to be paying for it.

Fund-based commission has historically been treated in one of two ways. It was originally intended to pay for ongoing services. The alternative use, adopted by some but not all financial advisers, is to treat fund-based commission as a deferred “reward” for the original product sale and advice. The argument for this approach is that they will have typically taken a lower up-front commission.

It might be common practice but this does not necessarily make it fair practice. A lot will depend on what you were told at the start of the process. Did the adviser lead you to expect you would receive an ongoing service? Did they put a formal ongoing service proposal in writing, explaining what this would cost and how this would be paid for?

All financial advisers (whether offering independent or restricted advice) have to abide by a set of regulatory principles known as treating customers fairly.

Two of the six outcomes that TCF is designed to ensure are particularly relevant to you. Outcome three is that you are provided with clear information and you are kept appropriately informed before, during and after the point of sale. Outcome six says that you must not face unreasonable post-sale barriers to change product or switch provider. This outcome could also be interpreted as meaning you should not face unreasonable barriers to changing adviser.

You have some options to consider. As you are happy with your existing adviser, your first port of call should be to ask him for a higher level of ongoing service. You should put this request in writing and list what you expect to receive.

Your requirements might include a formal written review report supported by a meeting to make decisions, regular valuations of your investments and newsletters to keep you informed of general investment and economic conditions. You should make it clear that you do not expect these review meetings to include a sales pitch.

Your adviser might put a price on this, if he is prepared to deliver it. You could then negotiate his proposed fees based on the ongoing fund-based commission payments he pays.

Doing this should mean you can arrive at a cost which you consider to be fair for the services that will be provided and which supports your adviser for its delivery.

An alternative would be to sack your existing financial adviser and find a new adviser who is prepared to offer ongoing reviews and service.

A possible barrier here is that some investment providers will not transfer the payment of fund based commission to new advisers without the permission of the old adviser.

Martin Bamford is managing director of Informed Choice


Manager focus: Julius Lipner

Aviva’s latest recruit, Julius Lipner, has outlined the investment process he is using on the group’s recently-launched UK Absolute Return fund


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