Money Mistake 2 - Must Negotiate On Commissions v Fees
Other Mistakes: 1. Going Direct 3. No Reviews 4. Poor Quality Adviser 5. Investment Timing
Imagine you walk into your local bank or insurance company and see their so-called expert financial adviser, or 'Johnny Salesman' as we shall now call him.
Mr Johnny looks good, he has a nice suit, he seems plausible because you are not sure what he is talking about anyway, you trust him - it is the bank after all and do not forget most banks own their own insurance company, so that must be good.
Let us imagine you have £10,000 to invest.
If you invest £10,000 in an Insurance Investment Bond, the likely commissions the insurance company would pay to Johnny Salesman could be between 5% and 7% i.e. £500 to £700. Not bad for a few hours work.
What if you change your mind at the last minute and decided to invest £20,000 in the bond?
The commissions would then be between £1,000 and £1,400. Mr Salesman is paid double for doing exactly the same work. Remember, it is:
Whilst not for all advisers, but for many this may lead some 'Johnny Salesmen' to product and commissions bias, with many products being over-sold or even worse.
You would probably have been much better offer agreeing a fixed commission or fee cost for your investment.
Fixed Cost Commissions and Fees May Mean You Pay Less Overall
The difference in the charges for a policy that has had commissions built into it versus one which has had commissions discounted or reinvested can be huge.
For example, with Stakeholder pensions, yearly management charges may vary from 0.7%* per year for a nil commission, fee based advice plan, through to 1.0%** per year for an average stakeholder scheme or even 1.5%** per year for some of the highest charging plans.
This may not seem a lot today, but if you have £100,000 built up in your pension fund in say 10 years, this could be a difference in the yearly management charges deducted from your pension of up to 0.8% per year (1.5% minus 0.7%). That’s an incredible £800 in that year.
Multiply that difference in management charges by 10, 15, 20 or 30 years and you may have been much better off negotiating a fee with your adviser.
Conclusion - Barter - Negotiate
By keeping your policy charges low, agreeing a fixed fee or commission and reinvesting the balance of commissions, you will normally obtain much better value for money products and services.
You will also be secure in the knowledge that you have received totally unbiased advice, as the adviser will get paid a fixed amount, irrespective of the investment, policy or mortgage arranged.
Cannot Offer Fixed Price Advice
What if the bank, insurer, lender or adviser states that they do not offer or cannot work on a fixed fee or fixed commission basis?
Why do you think that would be? Would it be because it is not a particularly good deal for them? Surely not?
We suggest you look elswhere as you are likely to obtain the terms and product that you require from another financial company.
ALWAYS ASK FOR A FEE BASED OR TIME COSTED OPTION - BARTER - NEGOTIATE
* Source Norwich Union Stakeholder Pension - Financial Advisers Nil Commission Terms
** Source Defaqto