MONEY COMMENT
Why Pay More For Less?

By Cliff D'Arcy
June 20, 2003

Last night, the Fool hosted the second of our women's workshops, presented by Jane Mack and Jasmine Birtles. These are aimed at making the fairer sex richer by showing them how to budget, spend, borrow, save and invest better. Last night's event was very successful too – every woman I spoke to enjoyed it tremendously.

One warning that Jane and Jasmine gave to their audience was about commission-driven advice. They advised our guests not to go to their banks for financial advice (as most women – and men - do). This is because bank advisers only sell one company's products - their employer's - and can't offer us the best products available. What's more, high street products are invariably overpriced.

Secondly, these tied agents have aggressive sales targets and aren't going to turn you away without selling you something – even if that product isn't suitable for you. Thirdly, the advice these people give is often driven by their own need to earn money. In essence, this isn't an environment geared towards giving "best advice", because the salesperson is being driven by his/her desire to earn commission.

Obviously, people providing us with a service deserve to charge a fee for their time. But the problem is that the commissions and charges built into financial products can be absurd. For example, take my recent search for life insurance. All I wanted was a basic term assurance policy, which pays out if I die in the next 25 years and doesn't if I survive. This is a simple product with no investment element that is widely available and, therefore, easy to shop around for.

Buying this cover reminded me of why I'm always wary when dealing with financial firms. Just for kicks, I checked how much my policy would cost with several high street banks (which usually hugely overcharge for most protection and investment products). It was laughable – some wanted over £120 a month for this simple, cheap protection.

In three minutes on the web, I found an identical policy with Legal & General (LSE: LGEN) for under £54 – far less than half the price of the high street outlets. Bear in mind that I'm paying 300 premiums for 25 years' cover, and you begin to see how extortionate the banks' payments are.

I followed up my article with this post, where I revealed that I had found an independent financial adviser that doesn't give advice or charge commission on financial products. Instead, it imposes a £25 flat fee on each product it sells. This IFA would charge me under £37 a month for my policy – much less than a third of what the banks wanted.

So, next time you're shopping around for financial products, take a long, hard look at the documents you're given. Pay particular attention to the section entitled, "How much will we pay your adviser" or similar. If the figure looks too high (and it often does), don't buy the product and keep shopping around. If you know about the Rule of Three, you'll keep going until you find that unbeatable deal.

Having done all the legwork by shopping around for my insurance policy, I don't see why the insurance company should charge me commission for coming to it. Most companies will charge you commission even if you approach them direct, so always try out a few discount brokers when shopping around.

Finally, the winning quote for my life cover includes the phrase, "We won't pay any commission to your financial adviser", which is something that I'd like to read more often!

More: How To Spot Dubious Advice | A Plain English Guide To Investment | Stamp Out Dubious Advertising