Is Fee Based Advice Best?
Many savvy investors in the UAE are turning to a fee based financial planner. But the traditional commission-based service is still the norm in the market. In this article, we compare the two payment methods.
Under the commission-based approach the person buying a financial product would not know the amount they are paying for the service. The cost of the advice is built into the investment or insurance plan charges. Payment under this method is made to the advisory firm by the investment or insurance company recommended. Often there are disparities between the commissions paid by different companies and so the suspicion is that the company paying the highest wins the business. Since commissions are rarely disclosed to clients in the UAE, this suspicion, justified or not, is unlikely to fade.
Fee Based Financial Planning
Under this method, the client and adviser agree the fee at the outset. This fee does not vary according to the financial services company recommended. The client has a clear understanding of what they are paying for the service. Payment may be made direct to the advisory company by the client. However, in most cases, the payment is deducted from the amount invested or the monthly premium by the investment company and paid to the advisory firm.
What Is The Effect Of Fee Based Advice?
Fee based advice has been the norm in many developed markets for several years. The impact has been that the cost of advice has generally declined. However, with lower margins, the minimum value of account a fee-based adviser can take on has increased. This has seen those with more modest sums to invest who want advice not being able to obtain it from a professional.
In the UAE, both approaches remain open to clients.
Is Fee Based Planning Important?
If an adviser can disclose the level of commission being paid on a policy, then their client will know the amount they are paying for the advice and they can make an informed decision. However, it is rare to find this degree of transparency in the UAE market. For this reason, financially astute clients are moving to a fee based financial planner.
Financial services fulfil long term needs. It may be to provide protection for your family or saving for retirement. Along the way, you will need help and guidance from your trusted adviser. To ensure the adviser has a commercial incentive to provide you with this assistance, the structure of the payment is also important.
Many regular saving plans and insurance products provide a lump sum to the advisory firm at the start of your plan and then little thereafter. This structure actively disincentivises the advisory firm from providing the service you need and encourages new sales. Ideally, the amount you are paying for the service should be spread out over the term of the plan.
A Fee Based Financial Planner will have a schedule of services they provide. There may be one fee for analysis of your needs, recommending and implementing a plan and a separate fee for on-going service. Where this is the case you should check with the adviser that you have the right to cancel the on-going fee at anytime. You should also have the ability to transfer the fee to another advisory firm without penalty.
A fee based financial planner offers a greater degree of transparency over the traditional commission-based salesman. Other important aspects are the company they work for, professional qualifications and experience. For more information on how to choose a financial planner click here.
For a better understand of what financial planning is, with or without an adviser, and why it is important please visit this page.
If you would like a free initial consultation with a qualified, fee based adviser, please click here.