How is an IFA paid?
Traditionally IFAs have relied upon commission paid by product providers to pay for their services. In recent years there has been a shift towards fee based advice as this is perceived as fairer toward the client. However, due to under-capitalisation in the advice sector and consumer reluctance to pay for something they perceived as getting for free, the transition to fee based advice has been slow and concentrated in the high net worth sector.
To encourage client's awareness of the cost of advice, and to stimulate a market in advice, the FSA has introduced a new disclosure regime for advisers giving regulated investment advice. Since July 2005 this regime insists that advisers who market themselves as independent must offer the option of paying a fee for advice. The three main remuneration options available are as follows:
- Commission: Traditionally the most common way to pay for advice is for the IFA to receive a commission from the product provider. The amount of commission must be disclosed, and some IFAs will rebate a portion of their commission, particularly in Execution-Only cases. The amount of commission and whether it is deducted from the amount you actually invest or is included in the cost of the investment varies from product to product. The client pays for commission from product charges so it does not represent 'free advice'.
- Fees: Less common than commission, all IFAs must offer the option of working for a fee. Depending on the size and type of the investment, and the complexity of the advice, this can work out cheaper than paying commission. Paying a fee for advice is the best way to ensure that the advice is impartial and there is no incentive for the IFA to recommend a product solution.
- Combination: It is also possible to pay a combination of fees and commission. In this situation the IFA will rebate a proportion of the commission they would have been due in a commission-only scenario.
There are strict requirements for the type and amount of payments to IFAs to be clearly disclosed, so it would normally be quite easy to determine the cheapest option for a particular investment.
