Commissions are effectively banned on all financial products (except personal life insurance policies) by no later than 1 July 2014. If a retail client establishes a new master trust or wrap account type product after this date, commissions cannot be paid to a financial planner. If the financial product concerned is a direct investment (i.e. not through a platform), commissions cannot be paid if a retail client invests money for the first time after 1 July 2014 into the product.
Entry fees are calculated as a percentage of the amount you invest each time you plonk money into an investment account.
The average entry fee is around 2% while some advisers earn much less.
Example of the impact of entry fees on your investment
If your adviser charges a 2% entry fee, then each additional investment earns them a payment equivalent to 2%. On a $10,000 investment, this represents a $200 fee. It also means you have a balance of $9,800 - rather than $10,000 working for you in the account.
Trailing commissions are calculated against how much money you have invested in a particular product.
They are incentives paid to advisers to encourage them to continue to monitor and service clients' financial planning needs.
Given trailing commissions are charged against the value of an account - rather than additional investments - the size of the trail grows (or falls) in line with an account balance.
The average trail commission is approximately 0.35% per annum.
Also trailing commissions are generally paid from investment fees paid by investors to a fund manager and so on. As a rule of thumb, the lower the trailing commissions, the lower the investment fee.
These commissions still apply to most investments entered into before 1 July 2014.
Example of the impact of trail commissions on your investment
A trail commission of 0.35% per annum means that for every $100 000 you have invested, the financial adviser receives a commission - a fee - of $350 annually.
Soft dollar incentives
Non-monetary incentives are also banned, such as overseas trips, prizes, marketing allowances, and gifts.
Small incentives (below $300 in value) are not banned provided they are not given on a frequent basis.
Benefits that are predominantly educational or training-based (at least 75% time based) are not banned either, assuming the provider does not pay for travel or accommodation for the financial planner to attend.
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