The consumer dilemma: commission or fee?

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IS IT really cheaper to go through a financial adviser who charges a fee rather than one who gets paid through commission?

This question will be brought into focus in July, when new rules will mean consumers are told for the first time how much their financial advisers earn in commission on the products they sell.

The Government and consumer bodies expect the revelation that financial advisers earn hundreds of pounds in commission to produce a proliferation of fee-based advisers.

Rates among fee-charging advisers vary from about pounds 50 to pounds 250 per hour. The rates charged often depend on the level of experience of the person giving the advice. Many such advisers also give customers the option of paying them through commission on more straightforward transactions.

Accountants and solicitors tend to charge by the hour, and have found it easier to go down the fee-charging route for their financial planning business, which is an adjunct to their main activity.

The commission paid to independent financial advisers, who are authorised to give advice on all the products available, and tied agents and direct salesmen, who sell only the products of one company, varies by company and by product.

For instance, for a pounds 50 per month 25-year endowment policy, the average commission paid to an independent financial adviser is pounds 507. For a tied agent or direct salesman, the average commission is some 14 per cent higher at pounds 578.

For a 30-year-old investor, a monthly premium of pounds 50 is enough to back a pounds 35,000 mortgage.

The monthly premiums needed to build up enough cash to pay off a more typical pounds 60,000 loan are about pounds 85 a month. The average commission paid to an IFA on this amount is about pounds 861, while a tied agent would receive commission of about pounds 982.

The vast majority of endowments are sold through the high-street building societies and banks, most of which are tied agents.

Arranging a mortgage could take between seven and 15 hours. Therefore, the total costs of someone arranging a loan through a fee-paying mortgage broker could vary from pounds 350 up to pounds 3,750. Where bigger loans are concerned, and the commission could run into thousands of pounds, it could be more cost-effective to go to a fee-charging broker. For smaller uncomplicated loans, a commission-charging financial adviser may be more cost- effective.

For advice on pensions, the situation is slightly different. The financial advisers contacted said that at the very least it would take four hours to give advice on a personal pension.

The time can soon mount up if the pension involves a transfer, or if it involves a company pension. The average commission paid on a pounds 50 per month 25-year personal pension bought through an independent financial adviser is pounds 387. For one bought from a direct salesman, the commission is pounds 420. The fees charged for just four hours' work would be from pounds 200 to pounds 1,000.

For anyone contemplating taking out a personal pension based only on the Serps rebate from the Government, commission rates are even lower, amounting to about pounds 50 per year. In this case, the fee route is not cost-effective.

Commission on unit trusts is about pounds 30 per pounds 1,000 of investment - on a pounds 6,000 Pep the total commission would be about pounds 180. Fee-based advisers said that the minimum amount of time to arrange and advise on a Pep would be about four hours, costing a minimum of pounds 200.

Steven Cave, head of corporate pensions at the fee- charging independent financial adviser Moores Marr Bradley, said: 'Our more senior consultants charge pounds 125 to pounds 150 an hour, while junior ones charge pounds 50 to pounds 75.' He said that the amount of time spent on a particular case was different for every client.

Clive Springle, a partner with Ashdens, a fee-charging accountancy firm, said: 'We feel that fee-charging is the only way forward.'

His company charges pounds 90 per hour. He admitted that the minimum number of hours' work needed for arranging a pension, for instance, would be four hours. Under regulations of the Institute of Chartered Accountants, Ashdens has to tell its clients the commission it could earn from the products it recommends. However, accountants are not obliged to rebate the commission.

Philip Porter, managing director of the independent financial adviser Morgans, said that it offered three options. The first level meant that the consultant was remunerated through commission.

The second option involved a annual fee of pounds 250, plus some commission, while the third involved charging an hourly rate of from pounds 100 to pounds 250 per hour, depending on the complexity of the transaction.

'Fees will include meetings, letters, telephone calls and research carried out for the particular client - all commission is rebated.'