Commission Explained
We know from experience that many people find the way that commission works confusing and have shown some examples below, which will hopefully provide clarification. However, please bear in mind that the amount of commission available varies widely depending on the type of product and that not all products result in any commission being paid. The first example highlights the effect of taking different amounts of commission from a product provider.
A client wishes to invest £200,000 and the maximum amount of initial commission paid by the product provider to the adviser for arranging the client’s transactions is 3%, which is taken by ‘Adviser A’. However, if ‘Adviser B’ only takes 2% this would usually result in either a reduction to the contract charges or an enhancement to the amount invested (depending on the type of contract and the provider’s terms). Either way, the value of the client’s investments under Adviser B over the medium to long-term (assuming identical investment returns) would be higher than if the full amount of commission were taken.
Some investments pay up to 8% initial commission and therefore it is very important that you are aware of exactly how much commission is being paid to your adviser. The key fact to remember with fee-based advice such as that offered by Midland Financial Solutions Ltd, is that you decide how much commission is taken (if any) and how it is used, for example:
The same client in the above example agrees a fee at outset with their adviser of £4,500 for research, recommendation and implementation of their investment portfolio. The adviser is completely fee-based and therefore the client has the following options:
• The adviser could take £4,500 of initial commission (2.25%) to cover the fees in full, leaving the client with nothing further to pay (assuming this level of commission can be paid). If this is less than the maximum amount of initial commission available, the contract charges could be reduced, the investment amount enhanced or the excess commission refunded to the client (this option is not possible for all products).
• Alternatively, the client could pay the adviser’s £4,500 fee and the investments arranged instead with no initial commission being taken. For some types of contract that pay high levels of initial commission, this can result in significant reductions in contract charges or enhancements to the investment amount that can be much higher than the fee paid!
When formulating our recommendations to you, we will discuss fully the commission options that are available; so that you can decide which option best suits you.
Because Midland Financial Solutions Ltd offer completely fee-based advice and our aim is always to provide you with the most suitable advice for your own particular circumstances, we may recommend solutions where no initial commission is available to offset against our fees.
However, a commission-based adviser only gets paid if they arrange transactions that result in a commission payment from a product provider. That is why we believe that fee-based advice offers you greater transparency and greater confidence that any recommendations made serve your best interests.
