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Seeking Investment Advice: What's Better, Commission Or Fees?

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Contributor:
Mary Holm
Mary Holm

Question:

So you think if financial advisers charge fees that will solve everything. I have spoken to several advisers that have moved to fees only. They have all sacked their smaller clients.

Some are looking at the next logical step of charging for "first interviews" - that makes shopping around for an adviser a costly exercise.

I believe that in many cases commission payments are much better value for the client as they reduce the transaction costs of invoicing and billing. There are also other hidden costs to charging fees such as bad debts and tax implications.

I don't think charging fees will solve anywhere near everything. It's simply a good start.

Answer:

Mary Holm: For readers who didn't see this column on November 7, a correspondent asked how to find a fee-charging independent adviser who does not get paid commission. She continued, "We are happy to pay a professional hourly rate for a qualified and experienced person to give us some advice on various investment options."

I responded with an invitation to investment advisers who charge fees and who meet certain criteria to send me information to list in this column. I added, "Readers should be able to rely on these advisers to put clients' needs first - as opposed to recommending investments that give the adviser the highest commissions or other rewards."

Your comment that the fees-only advisers you know have got rid of clients with less money is disappointing. I would have thought an adviser charging by the hour could still do well with "smaller" clients. And if they charge a percentage of the amount invested, they could always have a minimum fee.

The advisers in our table have widely varying minimum investment amounts, but about a quarter have no minimum. Apparently they can make it work to have "small" clients.

As for charging for first interviews, every adviser in our table except two say they don't charge. The exceptions are Irene Durham and Herald on Sunday columnist Martin Hawes, who both offer free initial phone conversations. Some advisers stipulate the first free meeting is only for half an hour. Readers should ask about this, so they know where they stand.

Your belief that commissions reduce costs may well be true. And it's possible that advisers who receive commissions pass those savings on to their clients one way or another. But I can't get excited about a business that might not serve its clients' best interests just because it has lower costs.

As far as hidden things are concerned, I wonder how you would defend "soft commissions" such as gifts, entertainment or travel, which financial product providers often give advisers as inducements to recommend their products.

I hate to say it, but your attitude is typical of many commission-paid advisers I've spoken to, who come up with any number of "reasons" why charging fees won't work. This little survey - with a surprisingly large number of responses - proves that wrong.
 
Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.      

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