When it pays to speak to an IFA

Commission makes free independent advice impossible - or so I heard years ago from the man who sold me two pension plans from Equitable Life. He worked for a salary and did not collect commission, he announced unctuously, so I would do better than with other companies. Now I spend a lot of time worrying about how much I have sacrificed by buying them.

Commission makes free independent advice impossible - or so I heard years ago from the man who sold me two pension plans from Equitable Life. He worked for a salary and did not collect commission, he announced unctuously, so I would do better than with other companies. Now I spend a lot of time worrying about how much I have sacrificed by buying them.

That may show the dangers of automatically accepting financial advice. If you see sales staff from Abbey Life, Fidelity or the Prudential you know just which firms they are going to recommend. But independent financial advisers (IFAs) are different

They always claim they can suggest the right contract or investment plan for you - and select the groups that are likely to do well. After the dramas over pensions mis-selling, and the traumas over endowment mortgages last year, some cynics are wary of any advice.

Varying commission rates can skew financial advice, though controls to try and prevent it happening are much tighter than they were. Everyone in the personal finance business has to fill in fact-find forms, to work out their client's needs, income and capital, their debts and assets, and attitudes to risk. Staff from the Financial Services Authority (FSA) can demand to see all the details and reasons for recommendations at any time.

Commission itself takes two forms. The sums you pay up front impose the highest penalties, because you incur them on money that would otherwise have most time to grow. Figures can vary. Advisers recommending most ISAs - individual savings accounts - will normally collect 3 per cent commission. The rate on with-profits bonds is 5.25 per cent. Regular savings plans in unit trusts offer less commission than life policies - and investment trusts provide less still. But rates vary within each area. Some advisers also collect "override commission" on top, if they provide companies with more than a given level of business.

The other payment to advisers comes from "renewal commission" that provides them with perhaps 0.5 or 1 per cent of the money their clients hold in a particular fund each year it remains there. That is less damaging than front-end charges because renewal commission is spread over time.

The Government has recognised this by introducing CAT standards, standing for cost, access and terms, for various investments and mortgages. If you choose an ISA which is covered by the CAT limits, there will be no up-front charges at all. The most that unit trusts or investment trusts can charge you is 1 per cent a year.

Admittedly, most CAT marked trusts are tracker funds, which do no more than match the performance, up or down, of the shares in the FTSE index, or the All Share index covering Britain's top 250 firms. Performance will be solid rather than exciting.

If you go for other investment ISAS you pay up to 5.5 per cent to get in, including start-up costs as well as commission. The more specialist the funds, the higher the annual charges will usually be.

Pensions will usually contain far more money than ISAs - and government controls will be tight once the new "stakeholder pensions" start in April (see page 1). In the past, massive "loadings" or charges at the front ensured that about 60 per cent of year one's payments went in setting up costs - including commission.

People will be free to take any pension plan they want after April as they can now. But if insurers want to put the stakeholder label on a pension, they cannot levy any charges at all as you start it. They will have to rely on an annual fee of up to 1 per cent to pay all their costs. Incidentally, people with stakeholder plans will be free to vary the monthly contributions they make, and to pay in lump sums if they want to do so.

This is a valuable feature, and makes them a lot more flexible than many more expensive personal pension products. Major pensions giants including Legal & General and Norwich Union have already launched plans with all the stakeholder characteristics.

There is certainly less potential scope for biased advice than there used to be, but there are two ways of reducing it still further. One way is for you to pay for advice directly, so that commission cannot come into the equation.

The cost of advice will depend on where you live and will normally be between £75 to £100 an hour, as an individual, though small firms may charge more. Some pensions specialists can charge people over £150 an hour.

"You can choose what happens to the commission concerned, " says Penny O'Nions of the Onion group. "People usually invest the commission, which makes most sense - particularly if there are heavy up-front charges on the plan involved. If they take the money in cash, they will lose out on the tax relief which applies to any ISA or pensions plan they have taken."

The second thing you can do is to cut investment costs, although this assumes you already know which product you want. You can choose a discount broker like Hargreaves Lansdowne, Chelsea Financial or the ISA Shop. They may send out circulars, recommending particular funds and areas, but will not provide individual advice.

They will also invest the up-front commission they receive back from the scheme you have chosen. The giants often receive higher than average commission, which can provide an extra boost to your money. They survive on the annual commission which financial service companies pay.

People can get paranoid about the impact of commission in skewing advice. Getting advice makes far more sense than making your own plans, provided you ask the right questions.

Advisers cannot guarantee to be right, but they are far less likely to be wrong than basic investors. IFAs will give more unbiased advice than anyone in direct sales, even with commission.

Paying for their advice - and investing the commission you would otherwise pay - is usually the best move of all.

* The Onions Group: 01494 726688; Chelsea Financial: 0800 0713333; Hargreaves Lansdowne: 0117 9889880; The ISA Shop: 0115 9587555