What does it cost to get financial advice?

Financial advisers have a variety of ways of charging you for their services, so it is important to ask your adviser at your first meeting how they charge, at what rate they charge and what you can expect for the money you pay for their services.

Commission

If a financial adviser charges commission, it means the fee will be included in the costs you pay for a product. The product provider will pay the commission to the adviser.

The commission should be disclosed to you when you get a quote for a product. If the product supplier or financial institution quotes the effective annual cost on the product, the commission paid to an adviser should be included in the advice section.

Commission can consist of:

• Upfront commission – paid as a once-off amount when you take out the product or investment; and
  
  
• Ongoing commission – paid every month for the life of the product or investment.

Upfront commission is typically paid when you sign a contract to invest in a savings policy, such as an endowment or retirement annuity, for a set term, such as five years.

This upfront commission is calculated as a percentage of the amount you will pay over the term of the contract.

It is paid at the start of the contract to your adviser by way of a loan, which is repaid when you pay your premiums or contributions.

Upfront commission payments have been identified by the financial services regulator, the Financial Sector Conduct Authority, as one of the reasons why products are being mis-sold.  They are also a cause of penalties being imposed on investors who stop or reduce payments on investment policies, such as certain retirement annuities, before the term agreed in the contract is reached.

The regulator has therefore limited upfront commission to 50% of the total commission that could be earned, and also put limits on the penalties that can be imposed. Savings policies and retirement annuities sold since 2009 can only incur a penalty of up to 15% and this penalty must reduce each year with no penalty being payable after 10 years.

Currently, the regulator is considering banning commissions on investments and only allowing advisers to charge agreed fees as and when you contribute to an investment, but there may be some exceptions when you are saving smaller amounts.

Advice fees

Many financial advisers have moved to charging fees only and these are structured in different ways.

Fees based on assets under management

Most advisers charge by asking you to agree to an ongoing fee that is charged as a percentage of the assets under management you invest via them.

These fees are deducted from your investments, retirement annuities and living annuities by the product suppliers and paid to your adviser monthly. This means you do not have to find the cash to pay these fees. You should see the rand amount of these fees reflected on your quarterly investment statement.

Typically, these charges are between 0.25% and 1%.

Advisers generally use a sliding scale, which means the higher the amount you have invested via your financial adviser, the lower the percentage advice fee charged. This is an attempt to ensure a fair charge for the amount of work your adviser does on your behalf and the risk the adviser takes in offering the service. 

Flat (rand amount) fees

Flat fees or rand amount fees allow you to get a professional service and be billed for it at an agreed rate.

Advisers may quote:

• A rand fee for a specific service – such as drawing up a financial plan or an estate plan with a will.
  
  
• An hourly rand rate for each hour an adviser meets with you and works on your financial plan, or spends time implementing aspects of the plan, such applying for the products recommended to you.
  
  
• A monthly rand-amount retainer that covers the services required and a certain amount of ongoing contact with the adviser.

Flat fees can be a good way to pay fairly for the service you get, but it does mean you will be presented with an invoice and you will have to find the cash to pay the fee. A monthly retainer can make the fee more affordable, but you may have to agree to pay it for a period.

A mix of fees

There is a trend to charge a rand-based upfront once-off fee for a financial plan and then an ongoing fee as a percentage of your invested assets under management for ongoing services and advice including:

• Annual review meetings;
  
  
• Tax planning and checking you are maximising the available tax breaks;
  
  
• Amending your financial plan as and when your circumstances change;
  
  
• Monitoring your investments, updating with new investments and rebalancing your portfolio;
  
  
• Informing you of any changes to insurance policies and benefits;
  
  
• Assisting you to access your investments for things like your children’s tertiary education, for example.

Some advisers charge a mix of fees or a mix of fees and commission. They may reduce these ongoing fees by the amount they earn as commission on any policies sold.

Advisers who only charge fees ask the insurer not to charge commission on the policies, which reduces your premiums.

Most advisers categorise their clients according to the fees they earn from them, and offer those paying higher fees more of their time and services. The more complex your affairs, the more time and expertise you are likely to need from an adviser.

MANAGING THE RELATIONSHIP TIP It can be difficult to have a conversation with your adviser about fees, but it is a conversation worth having. You need to understand what you are paying for and how, and you should then see the value of the advice you get. If not, you are likely to resent the fee you pay.