FT Adviser (23/05/2019) – It may be easy to confuse commission payments with percentage fees deducted from funds under service, but both are very distinct.

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.

“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.”

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.”

Full article link: https://www.ftadviser.com/your-industry/2019/05/23/how-adviser-charging-differs-from-commission/