Money: The real price of advice

Why cough up for commission, asks Harvey Jones, when you can do your financial planning yourself?
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Should you leave your investment and insurance planning to an independent financial adviser (IFA), or would you be better going it alone? Many people are sceptical about just how independent IFAs are. Most advisers earn a living from the commission they get on the products they recommend - a pretty clear conflict of interest. The pensions mis-selling scandals of the Eighties and early Nineties did nothing to silence the sceptics.

The trend seems increasingly against IFAs. People are getting used to using the phone for their banking and insurance, and accessing financial planning information from newspapers and the internet. A whole generation is becoming comfortable with this DIY attitude. Insurance companies and investment houses are slowly learning to present their products in a way we can understand.

Gordon Maw, marketing manager with Virgin Direct, says many customers of its financial products are refugees from a bad IFA experience.

"Many are fed up paying commission without getting any added value, and often suspect their IFA is chasing the companies that pay the most commission," he says. "With direct companies there is no commission and no sales pressure and this really strikes a chord."

Mr Maw says the traditional IFA defence that they can scan the whole market for the best policy for an individual has been undermined by the growing use of best-advice panels. IFA networks (the IFA's letterhead will say whether he or she is a member of a network) use these to narrow the choice of products their members can recommend. The deals will be decent performers, but the IFA is likely to be taking enhanced commission because of the large volume of business given to the companies selected for the panel.

Do you really need an adviser to help you choose when the odds are you will be recommended one by Perpetual, Fidelity, Jupiter or somebody else you have already heard of? The only difference will be that the IFA will trouser the initial commission, whereas if you go to an execution-only discount broker such as Chelsea Financial Services (CFS), they will give that commission to you.

Janice Thomson, managing director of CFS, says it currently gives all 5 per cent initial charges on a Perpetual ISA to the customer. "So if units cost pounds 1 and you invest pounds 1,000 through an IFA, with 5 per cent initial commission, you would get 950 units. With us you would get all 1,000. If you have done your research, going to a discount broker will reap rewards."

CFS offers discounts on ISAs, unit trusts and insurance bonds and makes its money from the much smaller annual renewal commission. "On a typical with-profits bond, the IFA earns 5 per cent initial commission. We give 4 per cent to the customer," Ms Thomson says.

But Clare Parkes, development director with the Society of Financial Advisers (Sofa), argues that the complex decisions involved in many decisions cry out for specialist help.

"If you have the time and interest to do detailed financial planning, fine," she says. "But specialist IFAs will know a vast range of products and their benefits, and find the most appropriate product for you. They should not cost you anything if they work for commission."

She says if you are worried about commission affecting your IFA's judgement, hire one on a fee basis. "But don't be embarrassed to ask what commission your IFA is earning on a sale; they are obliged to reveal this information."

When you choose an IFA, be prepared to haggle. If you decide to pay fees, ask to receive any commission paid by product providers, otherwise your IFA may be getting paid twice.

Andrew Bedford, marketing director with The Financial Options Group, an IFA network that gives customers the choice of fee or commission, says that with hourly rates ranging from pounds 100 to pounds 150, most people opt for commission. Where customers do pay a fee, he gives them any commission he earns.

He says planning yourself has disadvantages, as even a simple product such as term assurance has pitfalls in the small print.

"You may end up choosing a cheaper policy where premium rates are not guaranteed, so the cost could rise sharply in future. Other issues, such as whether to take waiver of premium cover, can also be forgotten," he says.

More complex products such as pensions beg a host of questions, he says.

"An IFA will consider all angles, including past performance, charges, likely changes in the fund managers and so on. Can you do this?"

In fact, there is a halfway house for pensions: you can go through a specialist pension discount broker such as TQ Direct Choice or Hargreaves Lansdown. These firms don't give advice, but do offer research and information - and will answer questions. The cost of taking out a pension with advice can eat up more than 10 per cent of your monthly contributions.

If you have complicated tax and financial affairs, it is worth taking fee-based advice from a highly qualified adviser. Look for a member of a professional body such as Sofa and check the qualification he or she holds. The Financial Planning Certificate (FPC) is the bare minimum. IFA Promotion can only direct you to advisers in your area, most of whom are commission-only. Sofa, the Money Management database and the Institute of Financial Planning offer a range of better qualified advisers who operate on a fee basis, or a mix of fees and commission.

n Contacts: Chelsea Financial Services, 0171-384 7300; Hargreaves Lansdown, 0117-980 9880; IFA Promotion, 0117-971 1177; Institute of Financial Planning, 0117-930 4434; Money Management Database, 0870-013 1925; Society of Financial Advisers, 0171-417 4419; TQ Direct Choice, 0800 056 1836.