Money: Fees vs commission: which choice pays?

Your adviser could charge you an up-front fee, or he may be paid by the company whose products he recommends - who will then pass on the cost to you. Roddy Kohn weighs up the options

"I am tired of love I am still more tired of rhyme but money gives me pleasure all of the time." Such were the thoughts of Hillaire Belloc, but it seems that for many modern-day investors, issues of money can be a little more testing than a poets' thoughts.

These days having some dosh brings with it a plethora of challenges that leave many confused. Let's face it, it seems that just about everybody wants to get their hands on your money. Glossy adverts boast double-digit returns, effortlessly available by dialling a number, filling in an advert or popping in to the local branch where you will be greeted with the words, "Would you like to see our financial adviser?"

Of course, if you have managed to resist these delectations, you might speak to a friend or colleague who just happens to mention that you should seek independent financial advice from someone who is licensed to talk to you about the vast range of available products.

Alas, even when you have decide to follow this advice, you have then to confront the thorny subject of paying the adviser either fees or commission.

There can be little doubt that if you are wary of financial advisers, then paying a fee is the most straightforward solution to your dilemma.

Over time, many in the media have written about the savings to be made through such fee arrangements. Often overly simple comparisons are made between a product, such as a pension, on which commission has been paid and the effect that this has on the final value at maturity, and the same policy where a fee has been has been charged.

Invariably the fee basis shows itself the better option.

I have found such comparisons are almost always deliberately slanted in favour of the fee method. Commission, after all, is a dirty word; it conjures up an image of someone without ethics, determined to get the maximum amount at all costs.

Rarely do you ever see that fees too can prove more expensive than meeting the adviser's costs via commission. This is because a fee-charger would ordinarily look for a sum to establish the investment or insurance policy which at first sight can appear significantly lower than the commission that would have been paid. However this only remains true if you were not expecting to receive ongoing advice in respect of that product.

Depending on the amount involved and the term of the investment, there are a host of issues which can have an impact on your investment and that will probably require further consultation with your adviser. Changes brought about in the Budget, income-tax considerations, changes in tax bands, changes in investment philosophy from maybe a growth portfolio to an income one, the premature death of a spouse, and so on can potentially alter the original purpose of an investment and would involve you in paying more money out to a fee-charging adviser.

Advisers who receive commission, however, will often agree not to charge you for such ongoing advice and services.

The secret in choosing the right adviser comes down to their terms of engagement - a document deliberately designed by the Personal Investment Authority to let you know where you stand. Unfortunately, too few read it in any detail. Yet it contains gems of information which should make you feel more confident about your dealings.

If you still don't feel sufficiently well-equipped to decide between fees or commission, remember that much has been done to prevent you being misinformed. In particular, the introduction of the "Disclosure of Information" in 1995 means that you now receive detailed breakdowns of the charges levied by investment or insurance companies and the commissions paid to your adviser. The object is to put you in a position to discuss with your adviser the validity of their charges, as well as to enable you to make comparisons between the different types of advisers, whether they be employed by a bank or an insurance company to sell only their products or where the product is being sold through an independent adviser.

Despite the existence of such valuable tools, there is still much talk about consumers being better off paying fees. This disregards those on low incomes and the young who invariably have not accumulated much capital. Perhaps worse still, this is an issue driven by misinformed politicians and advisers who like to take the high moral ground.

In truth, in the long run fee-charging advisers will more often than not make far more in fees than in commissions. In fairness to them, this argument reinforces the point that to make that extra money they have to be prepared to provide an ongoing service. What is clearly wrong, however, is for you to be led to believe that you are somehow automatically better off.

So when it comes to looking for advice, don't lose sight of the motto caveat emptor - let the buyer beware. Always look for somebody who has integrity and knowledge of the area in which you wish to transact business. Then sit down together and agree how remuneration should be resolved.

Roddy Kohn is an IFA with Kohn Cougar of Wellington House, Wellington Park, Clifton, Bristol BS8 2UR (0117 9466384).