Traditionally financial advice was paid for via commission. The adviser would provide the advice for ‘free’ on the basis that the commission from any financial products set up would pay for the advice. Obviously this isn’t ‘free’ advice, it just defers payment.
Since the Retail Distribution Review (RDR) in 2012, commission has been banned from investment and pensions products. However, this hasn’t stopped the practice of advisers offering the advice for free and then charging a fee to set up the financial product. But is there anything wrong with this?
In theory, there is nothing wrong with it at all. It allows for a zero risk way of you trying an adviser out before committing long-term. However, I believe it sets a conflict of interest that is difficult to shake off. Let me explain…
Imagine you are a financial adviser and someone comes to see you. They want advice on their retirement planning and they have £500,000 in various pensions.
You do an excellent job for the client, focus on their goals, and work out what they need to do to meet their goals; however, at the end of the analysis, they are fractionally better off keeping their existing pensions. All the planning has been done and there are no new products that need setting up. What do you do now? Do you present the advice and leave without earning any money for all your hard work? Or does your advice turn to focusing on finding a reason to transfer? One option is best for you, the other best for the client…
This is exactly the reason that when I set Clear Vision, we decided to charge separately for the planning element of our service. We can deliver a plan that results in the best outcome for the client in the full knowledge that we will be paid for our advice. Not only that, but it can actually work out cheaper!
Let’s assume that you had £250,000 in pensions and approached two different advisers for retirement planning advice. Both are highly qualified and offer independent advice. Adviser A offers to do the planning for free and charges 3% as an initial fee when setting up any new pensions and 1% ongoing. Adviser B charges £1,750 for the planning, 1% for the implementation and 1% ongoing.
|Adviser A||Adviser B|
|Total Fee paid in year 1||10,000||6,750|
In the example above, adviser B has more incentive to give the best advice for you AND the cost of advice is cheaper. Equally, if the best advice is that no implementation is required, Adviser B can give that and advice and still gets paid for the work done.
The moral of the story is that you don’t get anything for free, especially in the world of financial advice! Whenever anyone tells you they will offer financial planning for free, look a bit deeper to establish whether it creates a conflict of interest and whether it will actually cost more overall.