Channel 4’s Location Location presenters and property experts, Kirstie and Phil, “… offer practical advice and support to those wishing to find their perfect home. Searching across the country, they hunt for the best deals and locations, from cottages in the countryside to houses in the City, Kirstie and Phil have seen it all.”
Imagine if the rest of the Financial Industry worked like this?
Kirstie and Phil are buying agents. Buying agents typically offer their services at the high-end of the property market with ads like this:
“We’re uniquely placed to help you find your dream home. We source the very best city and country, waterside, character and period properties, most of which are not on the open market. Unlike our competitors we are completely independent, with no affiliation or ties with estate agents, no conflicts of interest whatsoever. Our only loyalty is to you.”
“Unlike estate agents we work for the buyer, not the seller, which puts us in the business of finding out exactly what it is our clients are after.”
Who pays the buyer’s agent their fees or commission?
The short answer is that the buyer pays the buyer’s agent their fees or commission. These fees are generally around 1% to 3% of the purchase price of the property and they are payable when the contract goes unconditional. Some buyer’s agents may charge a small fee upfront or they may charge 50% of the fee upfront. But most buyer’s agents would charge a small fee upfront and then the bulk of the payment will happen when your contract goes unconditional.
If the search was for a £1m property rather than a £500k property, would you expect the fee to be twice as much? If not, there are fixed fee options.
There are buyer’s agents who charge fixed fees of around £5,000 to £15,000 and it really just depends on the buyer’s agent that you go with. But at the end of the day you are going to be paying the buyer’s agent if you are the buyer because the buyer’s agent is working for you in order to help you find, research and purchase a successful property that may be your home or maybe an investment property. So they are working for you, they are generally not getting a commission on the sale of the property and so therefore they are just getting paid by you so they are working for your interest therefore they need to be paid and generally they are going to be paid by you.
If they were to be paid an Estate Agent commission, I’m sure you’d want to know about it in advance, and you’d expect it to be taken into consideration when charging you. If they were to be paid referral fees by law firms, removal firms, surveyors, and the like, I’m sure you’d want to know about that too. It’s the same with the rest of financial services.
How would you feel if they were paid by the Estate Agent a percentage based on the price you pay for the property? How would that influence the price negotiation. And, how would you feel if the Estate Agent paid your adviser a percentage every year you stayed in the property. Would you question it and wonder what that was for?
If the agent published the fee on their website, would that make you feel any better? If they disclosed it in your initial phone call, would that ease your concerns? If they told you that it wasn’t a commission, it is a contingent property search charge, would you feel reassured?
So, here’s my question for this post. Is your Independent Financial Adviser a buying agent or a selling agent?
IFAs call themselves “Independent” which would suggest they are. But all that means is they can act as selling agent for the whole of market, rather than being tied or restricted to just a few product companies. It doesn’t mean they are a buying agent.
All IFAs are financial intermediaries. The truth is, they all hold agency agreements with the product providers whose products they sell. Which makes them selling agents. What’s more, few agree to sign up to voluntary fiduciary duties, which is a legal obligation to put your best interest first. You rarely find the commitment you might see from buying agents in the real estate industry.
IFAs generally take an upfront fee (adviser charge) around 1% to 3% of the product they sell, plus an ongoing charge of between 0.25% and 1% per annum on the product you hold with them.
Some may describe this as a “fixed fee”, when clearly there’s nothing fixed about it. For some the payment is payable when the product is bought (conditional adviser charge), making the advice element appear free.
Lack of transparency on job descriptions, and the bundling of buyer and seller fees and services, could be costing you a small fortune. If you had greater transparency and clarity on whose best interest your adviser serves, yours, theirs or the providers, and a separation of fees and services, you would be well placed to make better decisions.
Wouldn’t it be clearer if there was a wall between advice and product? If someone who said they were an adviser was a buying agent? Someone who said they were an intermediary was a selling agent.
There is little to separate advice (buying) and product (selling) fees or services in the UK retail investment market. Services are bundled. Buying and selling costs are bundled. Invoices are not broken down and itemised. You are told you are paying for one service (buying), then you are charged as if for another (selling).
Seven years after the ban on commissions on UK retail investments, you might think things would be clearer. According to Which?, nine out of ten financial advisers still express their advice fees as a percentage of the products they sell you.
That would perhaps be okay if the adviser was just meant to be selling you a product. But the adviser, or financial planner, is not meant to be selling you product. By definition, they are meant to be selling you advice. Or a plan. Or happiness.
Take a look at what money can’t buy. Then ask yourself if these should be missing from your advice or plan.
“It is good to have money and the things that money can buy, but it’s good too, to check up once in a while and make sure you haven’t lost the things money can’t buy.” – George Lorimer, Publisher.
Imagine this customer proposition from your adviser.
“We’re uniquely placed to help you find your dream life. Unlike our competitors we are completely independent, with no affiliation or ties with product providers, no conflicts of interest whatsoever. Our only loyalty is to you. Unlike selling agents we work for the buyer, not the seller, which puts us in the business of finding out exactly what it is our clients are after.”
One way to find out whether your adviser is an agent for the seller, or the buyer, is to look at the way they are paid. How much are you paying for advice, and how much for product? And, how much can you save on adviser charges by taking a DIY approach to products?
Imagine paying your adviser a fixed fee of £1,000. You opt to go it alone and run your own investment on a DIY website. You choose the cheapest index tracking funds. Check your advice firm will accommodate this. If they do, you can be sure they are a buying agent.
If your investment was £200,000. The initial fee saved is between £1,000 and £5,000. The annual fee saved is between £500 and £2,000. After 25 years, you could put 30% more in your life savings (assumes investment growth of 6% per annum). That’s how important knowing the difference can be!
In this day and age, with all the red-tape and regulation, you might expect greater clarity in charges when it comes to your finances; and you might hope to understand with absolute clarity what it is you are paying for; but the reality stops far short of that. The reality is that despite all the regulatory changes, whether your adviser is acting in your best interests or not is less than clear.
Fees are all bundled up, with lack of clarity and separation over what services you are buying and who is acting for whom.
Many advisers can’t even answer a simple question, like am I paying for advice or the product?
A good financial adviser should make all costs and charges explicit to you at outset. So, you know exactly what you are paying and will pay in the future.
In September 2018, Which? Magazine found that only one in five advisers (20%) publish the full details of their charges on their website. A further 34% gave a rough cost. 46% gave no information whatsoever on their website.
When customers picked up the phone, 87% of advisers were willing to provide details of fees on the initial phone call, 62% without prompting.
But, here’s the thing.
Almost eight in ten advisers (79%) took their upfront advice fee as a percentage of the product purchased. And, almost nine in ten (87%) took their ongoing advice fee as a percentage of the product purchased.
Upfront fees averaged between one and three percent of the investment. Ongoing fees, between a quarter and one percent per annum.
Why should an advice fee be calculated as a percentage of product purchased? On large pots, you would not expect advice fees to rise proportionately. But, in nine out of ten cases they do.
What are they doing for the fee? You’d better be getting a good ongoing service.
To begin with, let us understand the services on offer from a financial adviser. There is the advice, which normally involves a financial plan of some sort. Then there is the product recommendation, brokerage service or intermediation. Then there is the product itself.
Now a vertically integrated firm, one that provides all three services, may quote one combined price. The price you pay may even be contingent on you purchasing a product. You pay on completion of product purchase. They may even describe the advice as free. Not much clarity here!
Intermediaries. Those that provide advice and intermediation. You might expect them to charge a fixed fee for the advice. But as you can see, eight out of ten take a fee based on the percentage of product recommended, and nine out of ten take an annual percentage to run the product for you.
Why does only 10 percent of adviser charges relate to the advice and up to 90 percent of adviser charges have to come from the products they sell you? Perhaps this is the best way to determine whether the adviser is a buying agent or a selling agent. Surely a buying agent would charge a fixed fee!
Here’s an idea I had to restore trust and confidence in the advice industry, for you to trust that you are getting what you pay for with none of those conflicts of interest.
A wall between advice and product.
Explicit disclosure of advice fee and product fee. Clear description and breakdown of service. Clear disclosure on whether your adviser is a buying agent or a selling agent.
Here are 10 things we can do to make financial advice more transparent:
- Separate advice and product. A clear wall between advice and product. Clear labels. We do this by having financial intermediaries defined as selling agents, holding agency agreements with product providers. And, non-intermediating financial planners who act as buying agents (buying a better plan, not a product), and not holding agency agreements with product providers, as their clients have decided to go the DIY route.
- Advisers banned from running products. Advice firms that put themselves out as buying agents should be banned from running inhouse investment propositions and prohibited from using customer money to run these products. We must end the practice of advisers running products to make money.
- Advisers are paid to advise. For buying agents, only 10% of income should come from implementation and ongoing management of those assets under advice or influence. Currently, over 90% does!
- Prohibit product providers from having controlling interest in advice firms. If they did, then clearly the firm is a selling agent of the product provider.
- Give advice firms a year to decide whether they would become a buying agent or selling agent.
- Keep selling agents as regulated. Keep buying agents as unregulated, to keep costs to a minimum and bridge the advice gap.
- Ban the use of the term adviser or planner for agents of vertically integrated firms. These agents are clearly selling agents.
- Prohibit buying agents from having agency agreements with product providers.
- Ban contingent adviser charges. Clearly such charges are contingent selling agent charges, not adviser charges, or in Plain English the Commission that was meant to be banned seven years ago.
- Prohibit buying agents from taking initial or ongoing fees as a percentage of assets under advice or influence.
Professional bodies can step up to the plate to hold buying agents accountable to codes and oaths. See my white paper here: https://www.transparencytaskforce.org/market-integrity-team/
Until then, my advice is, find a genuine independent financial adviser who will look after your best interests. Take your time about this. Talk to several. Have them explain every penny of costs involved. Have them explain the breakdown of services to you and their associated charges. Have them prove that your interests are aligned.
“Unlike intermediaries we work for the buyer, not the seller, which puts us in the business of finding out exactly what it is our clients are after.” – Steve Conley is the founder of the non-intermediating financial planning firm, the Academy of Life Planning.