How does commission work in practice?
Intermediaries are obliged to give you an insight into the amount of their commission if they sell you a complex product or mortgage. The commission is the remuneration which the intermediary receives from a financial institution (e.g. a bank) for arranging your mortgage. In the examples below you can read about how commission works in practice.
The time at which information on commission should be provided
Paul is someone who needs to know all the ins and outs and he is interested in arranging his pension via a bank savings scheme. He is, of course, aware that advisors also receive commission. That is one of the first things he asks during his initial telephone call with an advisor. The advisor is unable to give him that information immediately because he has not yet chosen a specific product. Information on commission will be sent to his home after he has had a meeting with the advisor.
How does this work in practice?
A financial advisor is obliged to tell you the exact amount of the commission before you conclude the agreement. The intermediary must issue you with written information and give you an opportunity to ask questions. An advisor is also obliged to draw up a financial services document on behalf of consumers. This document gives you an insight into what the intermediary is going to do on your behalf, what remuneration he is going to receive and the factors that play a role. This ensures you do not end up with any nasty surprises later on. The intermediary must provide this information after the initial introductory meeting.
A bank that sells its own product
For years Clarence has arranged all his banking matters with one and the same bank. Now he is looking to take out a second mortgage because he wants a new dormer window built. He goes along to his local branch and has a chat with one of the members of staff. The bank's offer is an attractive one. They also discuss the costs for providing advice. The bank employee tells him that costs will be charged for providing advice. The bank is not obliged to disclose how much these costs will be because it sells its own products.
How does this work in practice?
According to the current rules, only financial advisors are obliged to disclose the exact amount of the commission charged in connection with complex products. If you approach a bank or insurer directly, the provider must inform you in writing that advice and the distribution costs are going to be incurred (for example in connection with an advertising campaign).
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Mortgage and commission
Wim and Marieke are buying a house in Nieuwegein. They need a mortgage of € 200,000. They agree with a mortgage advisor that half of their mortgage will be an interest-only mortgage. They opt for the other part to be a savings mortgage. The mortgage advisor requests a number of quotes. Wim and Marieke study the terms and conditions and the interest rates and then make a choice. The advisor tells them he is going to receive € 3000 commission from the bank for having mediated. Wim and Marieke agree to this and sign on the dotted line.
How does this work in practice?
- At the start of 2009, the home owner interest group Vereniging Eigen Huis issued information on the average amount of commission charged per mortgage type. The commission amounts were 2% for a savings mortgage, 1% for an interest-only mortgage, 2.5% for hybrid mortgages, and 1.6% for a bank savings scheme.
- If your intermediary does not provide any information on commissions, you should ask for it.
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No commission obliged
Martijn is moving into digs. He wants to insure his belongings, for example for damage in the event of fire. He already has insurance for his computer, books and television. What he needs now is a cheap residence contents insurance. His parents suggest he contacts the advisors they use. Martijn wants to find out how much commission the advisors get from the insurance company for arranging the insurance. To his surprise it transpires that the advisors are under no obligation at all to disclose how much commission they receive for non-life insurance. They eventually do provide the information but only because Martijn keeps asking.
How does this work in practice?
- An advisor is only required to provide information on the amount of commission in the case of complex products or mortgages. A complex financial product is a combination of different kinds of products, for example a combination of investments, savings, insurance or loans.
- Above all, therefore, you should compare the conditions and premiums of non-life insurance policies.
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Equity-linked insurance
Joanne reads an article in a magazine about investing via an insurance policy. She contacts her financial advisor to make an appointment. The advisor conducts a detailed examination of her personal situation. An equity-linked insurance would be most suited to Joanne's financial situation. He tells her about his business contacts with four providers. Joanne wants to know what the differences are between them. The advisor explains the differences between the products. Joanne asks how much commission the advisor gets for his services. It transpires that the advisor gets more commission from one provider for his mediation services than from another. Joanne plucks up courage and asks whether she can get some of the commission back. The advisor agrees to her proposal. She saves € 500.
How does this work in practice?
- Compare the commission with that of a different intermediary and then negotiate as necessary. More information on the amount of commissions can also be found on the Internet. However, you should not just look at the differences in commission because, in the end, the important things are, of course, the advice and the financial product you are offered. If the product is too good to be missed and the commission for the intermediary is relatively high, this should not affect your choice.
- Try to be critical and establish what your intermediary exactly does for the money. Find out whether the work could be done for less, whether you can obtain some of the information and do some of the preliminary work yourself and get a discount that way.
- You should also ask about the commission the intermediary gets for other products (other than complex products or mortgages). The intermediary is not obliged to tell you this but you will have a better picture of things if he does.