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Do you have a financial adviser, and if so are you getting a fair deal? Fin24 user Jonty Heathcote gives some guidelines. He writes:
When it comes to investment products, there are a number of different fees you may pay. Typically these fees can be divided into three categories: administration fees, asset management fees (including performance fees) and advice fees.
Given the scope of the topic, this article will focus on advice fees.
For many of us, using the services of a financial adviser is a necessity. They can make sense of the complex world of financial services, have the tools and skills to guide us in the right direction and the ability to match the correct products to your specific needs.
It is reasonable that advisers get paid a fair fee for these services.
However, when it comes to commission, the rules of the game, as well as information asymmetry – meaning financial advisers typically have more information than you do when making decisions regarding your money – can lead to situations where you are not paying a fair value for financial advice.
Many of us are never aware that this is happening.
This is particularly true when it comes to commission (or advice fees) on investment-related products. Currently, the legislation in South Africa allows broadly for two types of commission and normally you will be paying either one or both of these fees.
Most of us will be aware that we are paying commission of some sort, but won’t necessarily understand how much commission is actually being paid.
The first type is a premium-, or contribution, based commission. In this case, a percentage of each and every contribution you make is paid to your financial adviser. Typically, this commission is levied to a maximum of either 3% or 5% of your contributions, depending on the investment product.
Some of this commission may be discounted over the expected term of the investment product, which means that it is paid upfront to your adviser.
The second type is a fund-based commission – sometimes referred to as an “annual advice fee” or “trail fee”. Rather than a percentage of your premium being paid to your financial adviser, a percentage of your total accumulated fund is paid to your advisor every month.
The maximum amount of this commission is typically 1% of your fund, levied annually. But as with all types of commission, this is negotiable.
It is clearly not easy to compare these two types of commission to decide what might amount to a fair deal. Although 1% sounds lower than 3%, over the long term a 1% fund-based commission may become significantly more expensive than a 3% premium-based commission levied on the same investment.
When comparing the relative size of commissions, the most important factor is actually the length of time you are planning to invest for. With a regular investment contribution, you are likely to pay more premium-based than fund-based commission if the investment term is shorter than 10 years.
- Fin24
Something on your mind? Drop us an emailand you could get published.
* Disclaimer: All articles and letters published on MyFin24 have been independently written by members of the Fin24 community. The views of users published on Fin24 are therefore their own and do not necessarily represent those of Fin24.
When it comes to investment products, there are a number of different fees you may pay. Typically these fees can be divided into three categories: administration fees, asset management fees (including performance fees) and advice fees.
Given the scope of the topic, this article will focus on advice fees.
For many of us, using the services of a financial adviser is a necessity. They can make sense of the complex world of financial services, have the tools and skills to guide us in the right direction and the ability to match the correct products to your specific needs.
It is reasonable that advisers get paid a fair fee for these services.
However, when it comes to commission, the rules of the game, as well as information asymmetry – meaning financial advisers typically have more information than you do when making decisions regarding your money – can lead to situations where you are not paying a fair value for financial advice.
Many of us are never aware that this is happening.
This is particularly true when it comes to commission (or advice fees) on investment-related products. Currently, the legislation in South Africa allows broadly for two types of commission and normally you will be paying either one or both of these fees.
Most of us will be aware that we are paying commission of some sort, but won’t necessarily understand how much commission is actually being paid.
The first type is a premium-, or contribution, based commission. In this case, a percentage of each and every contribution you make is paid to your financial adviser. Typically, this commission is levied to a maximum of either 3% or 5% of your contributions, depending on the investment product.
Some of this commission may be discounted over the expected term of the investment product, which means that it is paid upfront to your adviser.
The second type is a fund-based commission – sometimes referred to as an “annual advice fee” or “trail fee”. Rather than a percentage of your premium being paid to your financial adviser, a percentage of your total accumulated fund is paid to your advisor every month.
The maximum amount of this commission is typically 1% of your fund, levied annually. But as with all types of commission, this is negotiable.
It is clearly not easy to compare these two types of commission to decide what might amount to a fair deal. Although 1% sounds lower than 3%, over the long term a 1% fund-based commission may become significantly more expensive than a 3% premium-based commission levied on the same investment.
When comparing the relative size of commissions, the most important factor is actually the length of time you are planning to invest for. With a regular investment contribution, you are likely to pay more premium-based than fund-based commission if the investment term is shorter than 10 years.
- Fin24
Something on your mind? Drop us an emailand you could get published.
* Disclaimer: All articles and letters published on MyFin24 have been independently written by members of the Fin24 community. The views of users published on Fin24 are therefore their own and do not necessarily represent those of Fin24.
