Why Financial Planning should be Fee based

Most clients go to an adviser for advice not a shopping trip

Why Financial Planning should be fee based

There are actually two separate issues here, the first is the underlying client proposition and the second is how the client pays for the service. The traditional IFA model in theory can be fee based or commission based. For financial planning to work properly it must be fee based in our opinion.

First let us consider the traditional model. Most people progress through their lives without ever having the opportunity to properly consider the benefits that a financial planning service could bring to the management of their affairs. People tend to treat their financial programme as a shopping trip and they progress through their lives buying policies as a reaction to an event. It may be that you move house and therefore need a mortgage, you might change jobs and get advice on your pension, you might have children and decide you need some life insurance etc.[Return to Top]

The three major problems that can be caused by the reactive nature of this service are that the advice would tend to be problem solving, look at areas in isolation and the solutions would tend to be commission paying policies. This is in the hands of a good adviser, unfortunately there is the potential for the advice to be biased, very poor value for money and devoid of any context to show how your existing arrangements are interacting and how far you towards the achievement of your objectives.[Return to Top]

A commission service is in effect a retail service and the advisers who provide it rely heavily on the cross subsidisation that large commission based sales facilitate.[Return to Top]

Most clients go to an adviser for advice not a shopping trip.

Financial Planning as a concept sounds fairly straight forward. All you do is work out the client’s objectives, work out how far their existing arrangements will get them towards these objectives and design a strategy that will solve any immediate problems and facilitate ongoing monitoring. The proper delivery of this service however is considerably more complex.[Return to Top]

The result should be that you have a service that is more proactive, more holistic in terms of the areas covered and more comprehensive in terms of the level of advice that is being given. It will only work however if you have complete trust and faith of the impartiality of the advice and service being given. It will not work if the adviser has to sell you something to get paid nor will it work if what you buy determines the amount the amount earns.[Return to Top]

A commission based service places both the client and the adviser in the vulnerable position where one of them will nearly always be compromised. The only way to ensure the impartiality of the advice and the service is to make fee based.[Return to Top]