Incredulous commissions

I almost choked on my tea when I discovered an investment company was paying 9% commission to advisers. Why on earth would they do this?.

If you’re an investment company trying to sell product, how would you go about it? The obvious answer is to build as good a product as possible, which should more or less sell itself. The other, simpler, route is to pay higher than average commission to independent financial advisers (IFAs).

While some commission based advisers do the right thing and only recommend what’s best for their clients, there’ll always be others who can’t resist the lure of high commission and compromise advice in favour of profit (for them that is, not necessarily their clients).

Thankfully the commission levels on unit trusts are pretty much standardised at 3% initially then 0.5% ‘trail’ a year (if your adviser ever recommends a fund where commission is higher than this be very wary).

Insurance company investments (e.g. investment bonds and endowments) tend to pay more than this, probably because few people would bother buying them if advisers didn’t push them – so insurers need to offer higher commissions than unit trusts to tempt advisers to sell.

But sometimes a product comes along paying commission levels that beggar belief. The Sterling Mortimer No 9 UK Land Fund 2 offers IFAs up to 9% commission, nearly a tenth of the investment! It’s a specialist fund that aims to buy land with planning consent at a discount and aims to raise £100 million. It’s not an investment I’ve looked into, but the offer of 9% commission tells me all I need to know. Any investment worth its salt doesn’t need to pay commission above typical unit trust levels, and if your adviser recommends this fund it’s probably time to find a new adviser.

Remember, however an adviser might try and dress it up, commission ultimately comes out of your pocket. Commission based advisers must disclose how much commission they’ll earn before completing a sale, so always check and don’t be afraid to walk away. Even better, use a fee based adviser that charges either fair hourly fees or a fixed amount.

And next time an adviser does give you the hard sell on an investment; ask for proof that they’ve invested their own money. After all, if it’s so good why wouldn’t they?

You can view the typical commission levels paid on financial products towards the bottom of most pages in the investment, retirement and protection sections on this site.

Read this article at http://www.candidmoney.com/articles/article80.aspx