How does a stocks and shares ISA work?

cheerfulcat

earlgrey wrote: »

I'd agree with most of that D but S&S ISAs can be a pain in the butt too. Things like rights issues, returns of cash to shareholders by companies etc., all tend to be more complicated and incur extra costs when restricted by an ISA.

Of the four self-select ISA providers I use, only one ( Alliance Trust ) charges for corporate actions.

A big problem too is if an investor wants to move into cash in falling markets such as we've recently seen. Cash within a stocks and shares ISA will usually earn a lousy rate of interest, often round just 2% or so. Under the rules, cash can only be held within an ISA for a limited time and even the poor rates of interest are then hit with what amounts to a tax charge on top (even though it isn't called a tax). The inflexibility caused by ISAs can be expensive if there's no tax gain.

ISA-eligible gilts are currently paying ~5% tax-free.

I don't think that's quite correct. There's only no extra charge if the ISA manager considers the annual commission he gets paid by the fund manager is already sufficient to cover the costs. There can be an extra charge for funds with very low fund management charges such as some tracker funds and ETFs which pay intermediaries little or no annual commission just as there normally is on shares.

I have yet to come across an ISA provider which charges extra ( that is, on top of the fund's own AMC ) for holding funds in an ISA rather than outside. Which provider are you thinking of?

A minority of people would gain from an S&S ISA but the majority would probably not - whereas all income tax payers benefit from cash ISAs. Despite that, the prospect of avoiding tax, whether a reality or not, is widely used as a sales tool by financial advisors and salesmen who can earn commission selling S&S ISAs that they wouldn't earn on cash ISAs.

Over time there is a huge tax advantage to holding investments in a CGT-free environment, regardless of one's tax status. As Debbie points out, there is also the advantage of not having to account for dealings.

earlgrey_3

dunstonh wrote: »

Also, you ignore the long term benefit.

I don't think I have done that D. You seem to ignore as someone selling these products that for many people there will never be any tax benefit whether in the long or short term. Failing to point that out by those selling these products seems very common in my experience.

The number of people who would benefit from a S&S ISA was greatly reduced when it became impossible to reclaim the tax credit paid on dividends as it was under PEPs. Some people could still gain depending on their tax position - as I do. The majority will gain no tax benefit immediately, if ever, as they would do from a cash ISA.

I think it would help if the name was changed to avoid the confusion between the tax benefits for all income tax payers of a Cash ISA and the very different tax position of S&S ISAs for basic rate tax payers.

earlgrey_3

dunstonh wrote: »

That is possibly the case on some DIY providers (although I am surprised that it is the case) but with the fund supermarkets IFAs use there is no additional charges.

See for example:http://www.h-l.co.uk/fund_research/security_details/sedol/3190511.hl which says:
"¹ Additional annual charge of 0.5% + VAT is applied to this fund when held in the Vantage ISA and SIPP. This additional charge is not accounted for in the Total Expense Ratio quoted above.".

The annual fund management charge on that fund is just 0.25% (TER 0.27%) which is less than half just the annual commission alone paid by fund managers to IFAs from fund management charges that are typically six times higher.

IFAs who rely on annual trail commissions are less likely to recommend low management fee funds that pay them no annual trail commission anyway and some are openly hostile to them. Where they do, the fees may be recouped in other ways.

dunstonh

I don't think I have done that D. You seem to ignore as someone selling these products that for many people there will never be any tax benefit whether in the long or short term. Failing to point that out by those selling these products seems very common in my experience.

For some there is no immediate gain (although many portfolios do utilise fixed interest funds which do gain). However, as there is no cost difference between doing it unwrapped or wrapped in an ISA it makes common sense to utilise the ISA.

To not use an ISA would be a complaint waiting to be upheld.

Failing to point that out by those selling these products seems very common in my experience.

Sales reps are employed to sell products. Of course they are going to sell when they have the opportunity. Thats their job and that is their remit. Its a remit that is mostly misunderstood by people who believe they are real advisers. The FSA is to blame there with depolarisation muddying the water. However, the RDR proposals to take the "advice" tag away from sales reps would clear that up.

earlgrey_3

dunstonh wrote: »

For some there is no immediate gain (although many portfolios do utilise fixed interest funds which do gain). However, as there is no cost difference between doing it unwrapped or wrapped in an ISA it makes common sense to utilise the ISA.

Subject to what has already been said I assume you mean.

Sales reps are employed to sell products. Of course they are going to sell when they have the opportunity. Thats their job and that is their remit.

Let's not pretend that IFAs do not depend on commission, with just a few exceptions, in just the same way as those who work directly for the fund managers and that salemanship is not their most vital skill for profitabilty. A poor salesman will never be a successful commission based IFA.

The central difference between a tied sales rep and an IFA is similar to buying from PC World rather than direct from Dell. The PC World salesman can sell a range of products but the Dell salesman only his own company's. But both are salesmen reliant on commission.

I'm sure you are as honest as the day is long but we know that isn't true of all IFAs. Until we get to a system where vital financial advice can't be influenced by commission payments then there's room for advice that may not be in the customer's best interest even if it complies with the law. If that ever happened then we could have a truely professional system.

IFAs may provide an important service but we have to be realistic about how commission payments could affect their judgements.

dunstonh

IFAs are the largest introducers of business to NS&I. Yet not a penny is paid. The average commission on ISAs is 1.8%. So, by doing a cash ISA, the average IFA is losing £64.80 if they are on commision basis. Not being funny but do you really think that most are bothered about about £64. Especially when the typical investment amount is far more than that.

If you are that paranoid about potential commission bias then go fee basis. As a fee based adviser (most of the time its hybrid fee) I am all for that. The choice to go commission or fee is with the consumer. Not the adviser.

earlgrey_3

dunstonh wrote: »

If you are that paranoid about potential commission bias then go fee basis. As a fee based adviser (most of the time its hybrid fee) I am all for that. The choice to go commission or fee is with the consumer. Not the adviser.

I'm all for advice being fee based D rather than commission based but not hybrid fee + commission. Nor do I think it makes sense to buy fee-based advice from someone who normally gives commission based advice. You can't expect someone to give one sort of advice when he's earning commission and then something quite different when he gets a fee and still expect to look plausible. It won't happen.

I noticed you were very disgruntled that, I think you said it was Clerical Medical, had decided not pay annual commission to IFAs when they provided no on-going service to the client. You thought the decision would cost them. The questions I'd ask would be why should advisers get annual commission year after year for doing nothing and if they were not influenced by commission why would they stop selling Clerical Medical?

Advice has to be paid for and customers have to be realistic on to what extent the commission-based adviser will put their financial interests before his own livelihood.

IFAs are very tightly regulated because the authorities saw that regulation was necessary based on earlier experience. Some will work closer to the legal limits than others.

dunstonh

I noticed you were very disgruntled that, I think you said it was Clerical Medical, had decided not pay annual commission to IFAs when they provided no on-going service to the client. You thought the decision would cost them. The questions I'd ask would be why should advisers get annual commission year after year for doing nothing and if they were not influenced by commission why would they stop selling Clerical Medical?

I was not disgruntled at all. I pointed it out on an HBOS thread as CM are an HBOS company. Whilst CM were promoting it as a "treating customers fairly" approach where they were not paying advisers who were no longer servicing, which seems quite fair, they were not returning the trails/renewals to the client but keeping the money for themselves. That was the bit I was critical off.

I'm all for advice being fee based D rather than commission based but not hybrid fee + commission.

Hybrid fee is often more tax efficient or more convenient for individuals. In the cases of investment it rarely makes any difference. For pensions it is cheaper. So I cant see why you have an issue with it.

Nor do I think it makes sense to buy fee-based advice from someone who normally gives commission based advice. You can't expect someone to give one sort of advice when he's earning commission and then something quite different when he gets a fee and still expect to look plausible. It won't happen.

I dont agree with that. The same research tools are used. The same requirements exist. You are making the assumption that there will be a two tiered system but there is no evidence of that.

That said, fee paying clients are likely to be billed for everything whereas commission clients are not. For larger amounts fee basis will be cheaper option, even with that, but for smaller amounts commission option is cheaper.

As I said, the choice is there and choice is a good thing.

IFAs are very tightly regulated because the authorities saw that regulation was necessary based on earlier experience. Some will work closer to the legal limits than others.

Correct. Work needed doing. However, the FSA seem to be looking at this differently now and realised that the issues have come on the sales side and not the advice side. With increasing professional standards coming in and some regulatory dividend for doing so (ligher touch regulation has been suggested) the focus is turning to where the problems really are.

earlgrey_3

dunstonh wrote: »

I was not disgruntled at all. I pointed it out on an HBOS thread as CM are an HBOS company. Whilst CM were promoting it as a "treating customers fairly" approach where they were not paying advisers who were no longer servicing, which seems quite fair, they were not returning the trails/renewals to the client but keeping the money for themselves. That was the bit I was critical off.

So why not be equally critical of all the fund managers who don't give some or all of the commission they save to those customer who buy direct from them (presumably so as not to undercut IFAs)? Why just peeved at the fund manager who won't be coughing up to lazy IFAs who expect something for nothing? Why did you think it would effect Clerical Medical badly if IFAs would not be influenced by commission anyway?

Hybrid fee is often more tax efficient or more convenient for individuals. In the cases of investment it rarely makes any difference. For pensions it is cheaper. So I cant see why you have an issue with it.

Because a fee is paid directly which still doesn't guarantee lack of bias due to commissions.

I dont agree with that. The same research tools are used. The same requirements exist. You are making the assumption that there will be a two tiered system but there is no evidence of that.

No I'm saying the opposite. Paying a fee to a normally commision based advisor might not guarantee less biased advice.

Good unbiassed financial advice is important. Wouldn't you yourself prefer to be in an industry where all advisors were primarily fee-based professionals rather than in one where the primary need for success was to be a good salesman with the majority of IFAs coming from the tied salesforces that you say are so problematic? We seem to be a long way from that ever happening.

dunstonh

So why not be equally critical of all the fund managers who don't give some or all of the commission they save to those customer who buy direct from them (presumably so as not to undercut IFAs)? Why just peeved at the fund manager who won't be coughing up to lazy IFAs who expect something for nothing?

If you are going to go down that route then you may as well be critical of the like of HL who keep trail but do nothing for it.

Why did you think it would effect Clerical Medical badly if IFAs would not be influenced by commission anyway?

Because Clerical Medical dont know what fee agreements are in place with clients. Also, many contracts pay little or nothing up front but pay annually. It can take many years for some contracts on that basis to come close to the equivalents on up front basis (pensions can run past a decade to cover a fee). Those advisers that have used commission offset on a fee who then lose the commission and have yet to cover the fee would have to bill the client. A firm that alters charges and remuneration at a whim retrospectively without finding out the facts first is a risk.

Because a fee is paid directly which still doesn't guarantee lack of bias due to commissions.

I dont follow you. A £1000 fee whether paid by cheque or out of the investment commission is still £1000. What perceived bias can exist there?

Wouldn't you yourself prefer to be in an industry where all advisors were primarily fee-based professionals rather than in one where the primary need for success was to be a good salesman with the majority of IFAs coming from the tied salesforces that you say are so problematic? We seem to be a long way from that ever happening.

We could be as little as 12 months away from it. Customer agreed remuneration is still in the FSA proposals. I already work to that basis and it is estimated that 1 in 4 IFAS work to either fee or hybrid fee/CAR basis. So, its not an issue.

The natural career path for IFAs will always be from the tied salesforces. To go straight to IFA is damned hard. Its hard enough doing it from tied agent to IFA and I know many that have tried who have not been able to make that step up. The extra exam requirements will put an end to those that have been able to wing it.