Financial advisers: how do their fees work?

You’re used to paying a fee when you visit a doctor, or use the services of a plumber, electrician or car mechanic. But how do you pay your financial adviser, who is an expert in financial matters, for their advice and recommendations?

Financial advisers are professional experts who offer a range of services. For these services, they are paid a fee and/or commission. This amount should be fair and reasonable, and take into account their expertise, type of service and the time taken to deliver the service.

We asked the Financial Planning Institute’s David Kop, and financial planner Sunél Veldtman, and we took a look at some fees listed on various local and international advisers’ websites to find out how and what you pay your financial adviser.

Services a financial adviser offers

Financial advisers will complete a financial needs analysis to identify your financial needs. For example, to identify the amount of insurance or retirement savings you need. Based on the financial needs analysis and using their knowledge, skills, qualifications and experience, financial advisers can:

  • Help you manage your money so you can achieve your financial goals. This can include help with a budget and a financial plan.
  • Recommend and sell appropriate financial products such as life insurance, funeral cover, disability insurance, dread disease cover and income protection insurance as well as investments and retirement savings.
  • Assist with managing your financial products such as helping with claims on insurance products.

Paying for financial advice and recommendations

Commission
Most financial advisers earn a commission, which is either a percentage of a premium paid on a financial product or on an amount invested.

For example, an adviser conducts a financial needs analysis and recommends you take a life insurance product with disability cover. You agree with their recommendation, sign up for the product and pay a premium of R450 a month. Your financial adviser earns 3% commission, which is R13.50 (3% of R450). To make things easy, you pay one premium to the insurance company, and they pay R13.50 over to the financial adviser.

Fee
Some financial advisers also charge a fee based on either time, such as R750 an hour, or the service they offer, such as R10 000 for a financial plan. That might sound like a lot, but these fees vary depending on how experienced and qualified your adviser is, and on the service offered. You pay this fee directly to the financial adviser.

Advisers may also earn an income through a combination of fees and commission, such as earning a fee for a financial plan, plus a commission based on premiums paid or an amount invested.

It’s important to note that:

  • Commission is regulated and there is a maximum commission that can be charged to make sure the amount is fair and reasonable. The maximum amount varies per type of product and is usually a percentage of a premium or investment amount. For example, on long-term insurance products, the maximum commission is 3% of the monthly premium payable.
  • Financial advisers must disclose all fees and commissions.
  • You can negotiate fees and commissions.

Top tip: Always make sure you understand what the fees and/or commissions will be upfront and are happy with them. Your financial adviser will be able to show you what they earn and explain why they earn that fee.

Are the fees worth it?

There are some who argue that financial adviser fees and commissions are too expensive and not worth it, but studies indicate that a reasonable, fair fee is well worth it in the long run. This is because people with financial advisers make better financial decisions and save more – which ultimately gives them more financial independence, especially in retirement.

Keep in mind:

  1. Advisers are trained, skilled professionals
    Your financial adviser can help you make sense of the complicated, jargon-filled financial world. Many advisers have university degrees, some have completed postgraduate degrees, and all have undergone extensive training on financial products and financial advice.
  1. Financial advisers must comply with regulations
    Financial advisers must be registered with the Financial Services Conduct Authority (FSCA), who regulate financial services. In addition, financial advisers are required to keep their qualifications and industry knowledge updated and attend seminars and training courses.
    Top tip: Check your financial adviser is registered with the FSCA.
  1. Advisers help you stick to your financial plan and keep it up to date
    Unless you request otherwise, your financial adviser will keep in regular contact with you to make sure their advice and product recommendations are still suitable and appropriate. We have busy lives, and don’t always take the time to review our financial plans and products, so it’s a valuable, necessary service. Over time, your financial needs may change with your circumstances, so it’s important to ensure the plan is still suitable.
  1. You can complain if you are not happy with the advice you receive
    You can lodge a complaint with the Financial Advisory and Intermediary Services (FAIS) Ombud if you are unhappy about the advice you receive, or think it is unsuitable or inappropriate.

Bottom line

Financial advisers are skilled, qualified, experienced professionals who can help you achieve your financial goals and financial independence and build generational wealth for your family. Many advisers put in an enormous amount of effort to make sure their clients make good financial decisions and stick to their financial plans and recommendations – making the fee and commission well worth it.

If you are looking for a 1Life financial adviser to help you walk the road to financial independence simply email brokerservices@1life.co.za.

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