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Commission versus Fee for Advice – What’s Best for You?

Photo Credit: Auntie P

Photo Credit: Auntie P

To many people, commission is a dirty word.  It is synonymous with a back hander or under-the-table payment.

And for good reason.

Commission Can Cause Bias in the Advice You Get

You can’t be sure what bias your adviser feels towards a particular strategy when commission payments are not consistent across different financial products.

And rather than a commission payment being based on the amount of work it takes to arrange or maintain a financial service, they are based on the value of your house, the size of your mortgage, the cost of your insurance or the balance of your super fund.

Is Commission Here Forever?

I think, eventually, advisers taking commission will seem as old fashioned as a 1950’s doctor smoking in his whites.  I could be wrong.

But, if the current batch of financial planning students is any indication, it will start to happen in the next few years. The next generation of planners don’t believe in charging commission.  They intend to charge you based on the work they do, or the service they provide.

These idealistic university students annoy many financial planners (just read the comments in this article).  The old school claims that, because these soon-to-be planners haven’t had any real world experience, they are over idealistic and underestimate how challenging it is to run a financial planning business without taking commission.

Which is partly true.

Most financial planners also claim that many Australians can’t afford to pay for their services and that people will not seek advice if they have to pay a fee.  They claim that commission allows you to pay for financial advice by being bundled into the ongoing fees of your mortgage, super, investments or insurance.

Also partly true.

If you are like most Australians, you’re probably not ready to pay for your financial advice via a set fee (incidentally, paying via commission costs you more money in the long run – you’re even better off paying a fee for mortgage advice).

Paying a fee for financial advice isn’t always an option.

This is true for people with little or no savings.  And these people often need advice the most.  Commission charged through your insurance premiums, mortgage payments or superannuation balance can pay for advice you wouldn’t have been able to afford otherwise.  Effectively, you pay a little more each month, and the insurance company, bank or super fund pays your planner a lump sum when your insurance, mortgage or super is implemented.

Commission Costs You

But, commission inflates the cost of your insurance, mortgage or ongoing super fees – usually for life.  Ongoing trailing commission can cost you thousands – when the initial advice might have only cost hundreds, if paid upfront as a separate fee.

For example, the removal of commission from insurance premiums reduces your insurance costs by about 25%.

So what’s Best – Commission or a Separate Fee?

It depends on your situation. A good planner will give you a choice to pay for advice through a fee or via commission.

And, you should expect a justification for the amount of upfront and trailing commission your adviser will receive.  Remember, commission rates are flexible.

I believe this lack of transparency of fees and commission is the #1 reason that causes people to mistrust financial planners.

And that’s why the next generation of advisers, understandably, doesn’t want anything to do with commission payments.

But as commission can be in the best interest for people who need advice, but don’t have spare cash, it should remain an option.

It’s not the commission itself that deserves the bad rap, rather the reluctance of planners to openly discuss the different payment options available to you.  Many advisers present commission as a fait accompli, but it is flexible. And it does come out of your pocket.

A tip to help ensure you’re getting the right advice…

Ask any adviser who receives commission: what is the commission payable on other products you considered?  A good adviser will have no problem telling you. And if they haven’t considered any other products, you have the best indication you may be getting biased advice.

Use this calculator to see how much trailing commission you might be paying on your current super, insurance and mortgage.

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Posted by: Justin Brand
I'm an independent financial advisor and blogger doing my best to make financial services less complex, dull and intimidating.
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