How adviser charging differs from commission

The Retail Distribution Review in 2012 abolished commission fees, and gave birth to adviser charging, a fee structure based on advisers setting their own prices to clients for the services they provide. 

The idea behind this was that clients would be paying for the advice they receive rather than for the products they were being recommended. 

It differs from the pre-RDR regime, where advisers were paid commission by providers, for recommending products for their clients. 

So how is the adviser charging model different from commission?

Adviser-charging versus commission 

Ricky Chan, director and chartered financial planner at IFS Wealth and Pensions, says: "An adviser charge is an agreed fee for a professional advised service – it can be paid directly by invoice or facilitated through a product provider. Hence, regardless of how the fee is paid, it is a cost borne by the client." 

According to Mr Chan, the method of the provider deducting the fee from clients' investments and then paying the adviser firm is more “tax-efficient and beneficial” for clients. 

Experts stress that one of the biggest differences between commission and adviser charging is that commission is set by the provider. In contrast, adviser charging involves the adviser deciding what to charge its clients for the services it provides. 

Gemma Harle, managing director of Intrinsic’s financial planning and the mortgage network, says: “Adviser charging differs from commission specifically in that the level of charge levied is determined by the adviser, as opposed to the manufacturer of the product.” 

Mr Chan confirms: "Commission payments typically encouraged “churning” of investments in the past too – that is, the encashment of one product to reinvest in another due to large upfront commission payments, hence it resulted in mis-selling and consumer detriment.”

Ms Harle adds: “Pre-RDR, commission rates on products were controlled by manufacturers, and were perceived to be potentially anti-competitive, as seen in the outcomes the FCA set for the RDR changes to deliver.” 

RDR led to the following changes:

• Higher qualifications. Advisers are now required to hold stronger qualifications in order to advise clients. 
• Transparency on fees. It removed commission bias from the system.
• Transparency on types of services. This means advisers need to be upfront with clients on whether they will review the “whole of market” or be “restricted”, meaning they can only recommend the services of a limited number of providers. 

Mr Chan says that in the past potential to earn commission has influenced advisers’ recommendations on products and providers. 

He adds: “The upfront commission is recouped by levying opaque and high product charges on the clients’ investments, usually a “bid/offer spread” (entry charge) and a high annual product/fund charge.”

Different types of adviser charges 

Advisers typically provide three types of services for which they charge clients different rates for, according to Jeannie Boyle, director and chartered financial planner at EQ Investors. 

Ms Boyle says: “Commission was previously bundled into a variety of products, adviser charging can only be levied in exchange for services provided to the client and they must be fully disclosed and agreed. This could include: initial advice, on-going advice or an ad-hoc service.”

This is in line with Mr Chan’s view. He explains any ongoing adviser charges covers the cost of an ongoing adviser service, such as financial planning and investment reviews.  

“Any adviser being paid ongoing fees is responsible for the suitability of the product and underlying investments for the client.”

Mr Chan adds: “The fee and service can be stopped at any time so there would be no further deductions from the client’s investments.”

In its adviser charging factsheet, the FCA, says: “Ongoing charges should only be levied where a consumer is paying for ongoing service, such as a performance review of their investments, or where the product is a regular payment one.”

Funds under service 

So if RDR banned commission, then how do percentage fees charged for funds under service compare to commission? 

Ms Harle says:  “While some adviser charges look similar to commission payments, for example, an initial charge of 3 per cent of a lump sum investment is levied, the critical difference is that the specific amount is determined by the adviser, not the product manufacturer.”

Alastair Lewis, senior business development manager at Blackfinch, says: “Ongoing commission fees were generally paid out of annual product charges, as opposed to the encashment of funds invested.” 

“Therefore it did not appear that monies were being deducted from the funds. It was wrapped up opaquely within product charges,” Mr Lewis adds. 

saloni.sardana@ft.com