How Should I Pay My Independent Financial Advisor?

If you are using an independent financial advisor for the first time, you may find the set-up quite unfamiliar.  Whether you are looking for overall financial planning, or seeking advice on specific products, you will find yourself having to discuss very personal and private matters with a complete stranger.

Before obtaining specific advice from the independent financial advisor, you need to find out as much as possible about the advisor and how he/she operates.  This could help to make you more confident about sharing your personal situation.  One of the issues you must find out about is the charges and fees, and the advisor has to make these clear to you before beginning to work with you.

An independent financial advisor can be paid either on a fee basis, or on a commission basis, or both.  Any payment made by commission will be added to the charges you pay the provider.  However, the advisor has to give you the option of paying entirely by fee if you wish.

You will find many people suggesting that you should try to find a “fee-free” independent financial advisor – that is, one who is paid entirely by commission.  This is chiefly to enable you to to keep costs down if this is an issue for you.  Obviously it will save you from having to pay anything up front, so it may look like a good deal in the short term.

However, there are a number of reasons why it may be more sensible for you to go for the fees option.

• When you pay a fee, you know exactly how much you are going to be liable for and can budget for it.

• The factor that influences most people is that using the fee option eliminates  the possibility of bias on the part of the independent financial advisor.  Although the IFA is obliged by law to provide you with advice that is in your best interests, sometimes you can’t help wondering if the choice of product was influenced in any way by the commission. By using the fee option you can have confidence that the product is the right one for you.

• Paying fees can actually work out cheaper than the commission method.  When commission is paid, part of your investment is taken by the provider to reimburse them for the commission they have paid to the independent financial advisor.  How this is done depends on the product, but in cases like insurance products, where the commission is added to the premiums, you will be paying over many years instead of a one-off fee.

• Of course the independent financial advisor is a skilled person and needs to be paid for his/her advice.  If you make sure the advisor is paid by you, not by the product provider, you know that he/she is acting in your interest.

Of course the commission option does seem cheaper at first glance, since you are not handing over anything up front.  But you should beware of the downsides of this method, which could make it prove to be a false economy.  You may well find that paying fees puts you more in control and gives you more peace of mind.