Check the contract to verify fees
This is a follow-up comment on the ‘When Advice is Not Actually Free (Pt 1). I want to look at the statements in the previous article’s ‘you don’t pay us anything’ or ‘our advice is free’ and ‘we are paid/financed by the Czech/offshore financial institutions or product providers’.
While having debunked these comments, it is worth pointing out how ‘Adviser Charging’ works.
Adviser Charging
There are two ways to pay an investment adviser/financial planner.
- By the issue of an invoice for services rendered
- Adviser Charging / Provider Facilitated Charging
The first method is clear, although it is worth pointing out that such a service attracts VAT (DPH in the Czech Republic) and that adds to the cost of the advice.
Charges deducted from investment or insurance products to pay an adviser are currently exempt from VAT in the EU. Therefore, many may prefer to pay the same fees, via this method which is called Provider Facilitated Charging, as there is no VAT to pay.
So, what is Adviser Charging or Provider Facilitated Charging? Well, the UK’s regulator provides clear guidance on this and these principle can be applied outside the UK (https://www.handbook.fca.org.uk/handbook/COBS/6/1A.html).
Outside of the UK one could think ‘who cares what the UK regulator says?’. Well, the UK regulator offers guidance on avoiding conflict with fees that is highly regarded throughout the world and is a point of reference for many. Just because your adviser may not be regulated by the UK, surely it does not mean they can just ignore best practice and charge hidden commissions?
Key Principles of Adviser Charging
- The adviser is only to be remunerated for advice and related services for the client (by a deduction of fees from the product/investment in this case).
- The adviser cannot solicit or accept any other commissions. That specifically means the product provider cannot pay or ‘finance’ the adviser as some claim. The fees to the adviser can only be those agreed by the client and, make no mistake, this is a clear and specific agreed cost to that client and not a ‘fudge’ to make it look like a beneficial third party is covering those advise fees.
- Adviser charging covers the initial advice, recommendations and implementation of an investment or insurance product. Adviser charging also covers the ongoing service provided by the adviser if that is agreed by the client (for example, ongoing professional fund management advice).
- This means the client is receiving best advice about best products and investments as there is no conflict of interest. The client is paying exactly the same and the adviser is receiving exactly the same irrespective of the provider or product.
Change of Product or Adviser
Our previous article referred to ‘lock-in’ fees and exit penalties.
Wherever possible, exit fees and lock-in fees should be avoided and particularly where investments are concerned. However, the same should apply to advisers with ‘Adviser Charging’. Some of the lock-in terms are directly linked to covering the hidden commission that was paid to the original adviser.
True adviser charging ensures that there is no long term lock-in to the adviser. The investor should be able to change advisers within a suitable notice period (30 days would be reasonable) and cease payments to the original adviser. People change advisers for all sorts of reasons; change of location, unhappy with service, meeting another adviser and so on. While no adviser wants to see a client move on, there is no justification for preventing clients from doing just that.
Summary
Read the contract for services, often termed ‘Client or Adviser Agreement’ and make sure you understand-
- What the adviser is being paid (and that you agree with the amount)
- How the adviser is being paid- and from where
- How to exit the agreement if circumstances change
- The key point is that the contract from a non-fee based adviser is unlikely to mention any hidden commission or conflicts of interest or provider fees. Instead you will be told the advice is free or you, the client, do not have to pay anything to the adviser as the “provider pays us”.
Anything in Point 4 means you should seek alternative advice!
