How is your adviser paid?

I read an interesting article in the Wall Street Journal this afternoon, reporting on confusion about adviser fees and regulation.

This referred to a study in the US, where investors are faced with a choice of “fee-only” and “fee-based” advisers, with disagreement over what constitutes proper use of each term.

In the UK, since 31st December 2012, all investment advisers have worked within a system known as adviser charging. Commission on the advised sales of investment products were banned from this date.

There are however many different fee structures in the UK, with investors running the risk they might not understand how their adviser is paid.

Although commission on new advised sales is banned, many advisers still operate an equivalent system through the adviser charging model. They provide advice for ‘free’ and then deduct their charges from the product they recommend, often as a percentage of the assets invested.

This remuneration structure introduces a risk of bias, as highlighted by the Financial Conduct Authority (FCA) earlier this year. If an adviser is only paid when they recommend a product which facilitates the payment, chances are they will be motivated to recommend a product which facilitates the payment.

An alternative charging structure is to charge a fee for the advice and a separate fee for implementation of any recommended products.

This is an improvement, but still runs the risk of product sales bias if the implementation fee is a percentage of assets invested and is disproportionate to the size of the advice fee. Advice is the valuable bit, relative to implementation, and this is where the emphasis of any charges should be.

In terms of fees, advisers will charge either a percentage of assets, a fixed fee or an hourly rate.

There are no rights or wrongs in any of this, but investors should understand how their adviser is paid and what this remuneration structure means for their relationship with the adviser.

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