THE impact of commissions continues to be one of the most contentious issues in the financial planning industry.
Most financial planners earn their income from two sources: fees charged directly to clients for services provided; and commissions paid by fund managers such as AMP, Colonial First State and Perpetual.
The fees for preparation of a financial plan are normally between $500 and $1,000. This could be a flat fee, or the adviser may charge on an hourly basis.
Commissions are taken out of the money that clients invest and generally range from 1.5 per cent to 4.0 per cent. As well as up-front fees, advisers may receive annual trail commissions of about 0.4 percent.
For instance, if an individual invests $100,000 in a managed fund, then $3,000 (ie 3.0 per cent) may be deducted and paid to the adviser. As a result, the amount invested is actually $97,000.
Assuming the investment lasts for 10 years and the account balance averages $100,000, the adviser would be paid $400 (ie 0.4 per cent) each year by the investment manager.
Some advisers rebate all com-missions, so their only income is their fees.
In other cases, investors are entitled to ask whether com-missions influence the advice they are given.
In particular, do commissions encourage advisers to re-commend gearing strategies. For instance, instead of investing just the $50,000 you have saved, an adviser may recommend that you borrow an extra $30,000 so that you can invest a total of $80,000.
Gearing is a useful wealth creation strategy for many people, but it also boosts the up-front and trail commissions paid to advisers.
Investors should always ask their adviser for a full written breakdown of fees, commissions and charges (in both percentage and dollar terms) for each investment product and for the preparation of their plan.
