ou pay a fee for impartial reliable professional advice, you pay a commission for packaging, delivery and installation of a product”.
Many clients have become totally fed up with an industry which basically sells products of a long term nature yet earns most of it’s remuneration on the initial sale. Under this present system, business has flourished without any incentive to provide the all important after sales service and advice.
The essence of a professional relationship is that the advisor should put the client's interests first. This goes without saying in the more established professions and, of course, many commission based pension advisors do so. Fee based advice, however, has the merit of being demonstrably impartial. Charges are highly visible and the client is fully aware of who is charging how much and for what.
Fees are only justifiable where the advice is right and value is added. The advisor should have proper professional educational qualifications and should be clearly competent to advise. This kind of service is most economic for a particular type of client, usually where larger investments are made. On smaller cases, the amount of fee payable may well exceed the amount of commission payable under an equivalent arrangement.
Through no fault of their own, a commission based salesman has to make a sale to survive whereas a fee based advisor will still earn an income regardless of whether or not a sale is completed. It is inevitable that, in most instances, this will have an influence on the advice given. Fees do not work in a sales driven environment as clients would not expect to pay a fee to a salesman who failed to sell them a product. They can only succeed if a client is given professional and objective advice. The advisor should have an open mind and should be ready to create tailor made solutions rather than having to “squeeze the client into a mould of pre conceived ideas”. Advising is the key, not selling.
One of the disadvantages of a commission based system is that the complexity of product charges hides the cost of commission (and other costs) from the client. On larger investments, the amount of commission paid can far exceed the value of work carried out. For example, if the client has to discontinue a pension plan in the early years, there may be a substantial discontinuance penalty.
Commission based remuneration may restrict choice. Fee based advice opens up a wider market and includes deposit funds and other investment media not available on a commission basis.
Clients may have a delusion that commission based advice is free. This is certainly not the case. Any comparison of fund values between a commission and non-commission based product will clearly illustrate this point.
Most fee based advisors charge on a time costed basis. This means recording the number of hours spent on a client’s affairs and multiplying the results on an hourly charge or rate to arrive at an amount to be billed. Commissions received (if any) are then set off against this amount.
Other fee structures available include:-
- A fixed annual fee.
- A fee based on a percentage of assets/pension contributions.
- A combination of commission and fee based advice (with full transparency of charges).
The fee structure is recorded in a documented fee agreement completed by both the client and the advisor. Where a time costed basis is used, hourly rates apply for different activities e.g. consultancy, administration and secretarial work.
Once a fee agreement has been completed, the advisor will establish a client account. All fees are debited to this account and any commissions earned are credited to the account. The client is invoiced/credited with the balance, as appropriate.
As clients become more aware of charges payable under traditional commission based products, fee based advisors will play an increasingly important role within the pensions industry.
The above is the unedited version of an article written by Gervase MacCourt and published in the Irish Times - Monday 16th October 1995.
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