Quick IFA Question

Texas_Pete

Hopefully just a quick question you may be able to help me with.
How can an IFA justify giving advice (on a commission basis) of going straight to a company like Skandia with up front charges of like 6% over the use of a fund supermarket with very low or no upfront fees and reduced management charges?
Aren’t they duty bound to offer the best option regardless of commission achieved?

jem16

Texas_Pete wrote: »

Hopefully just a quick question you may be able to help me with.
How can an IFA justify giving advice (on a commission basis) of going straight to a company like Skandia with up front charges of like 6%

Skandia's initial charge is 4.5%

over the use of a fund supermarket with very low or no upfront fees and reduced management charges?

Fidelity and Cofunds (supermarkets used by IFAs) have a 3% initial charge. They don't reduce management fees.

What fund supermarket are you talking about?

Aren’t they duty bound to offer the best option regardless of commission achieved?

What makes you think they have not offered you the best option?

dunstonh

Skandia is a fund supermarket and has no upfront fees and can have reduced annual management charges.

Skandia's contract currently is explicitly charged. It has a maximum commission payment of 4.5%. So, if you agree a commission rate of 4.5% with the adviser than that is what they will get. That will result in an initial charge of 4.5%. If you agree a commission of 1% then the fee will be 1%. The annual management charges are the typical retail charges but they can take a nominated trail if they want (which can be more or less depending on the servcing you want). It is not possible to have up front charges over 4.5% with Skandia.

The adviser should not be influenced by commission bias and obviously fee basis avoids any perception of that but on the same count the adviser is entitled to be paid and you decide how the adviser is paid. You need to be aware that commission and charges are not always the same thing. For example you can get a stakeholder at nil commision on execution only basis and still pay more in charges than an IFA arranging a personal pension but being paid £2500 commission.

The FSA figures show that the average commission taken on collectives is 1.8%. So, if Skandia was used, that would mean the initial charge would be 1.8%.

edit: BTW, with unit trusts, you are looking at the retail charges for these. Typically 5% initial charge and 1.5% annual managment charge. If an IFA chooses to make them available cheaper on their own fund supermarket then that is their choice. If they choose to retail them at the retail price then its their choice. Your choice is whether you go to a different IFA or use that one. There are no fund supermarkets that offer no initial charges or discounts on annual management charges. There are IFAs that do this though but in exchange you accept execution only level of consumer protection.

Texas_Pete

Thanks for the replies.
I'm trying to get to grips with this investment (not made by me initially).

I think my 6% was wrong for an upfront charge. I had read 'IFA will receive £5600 at the commencement of bond'. This was from an initial investment of 80K and wrongly assumed this was coming out of the original sum invested (I realise £5600 is actually 7% of £80k).

It also states 'For first 6 years, an establishment charge of 1% of value of units from you lump sum will be met be cashing appropriate number of units each month' - so maybe this is how the commission is funded?

Sorry if I have mixed up any terminology - I was thinking of someone like Hargreaves Landsdown to buy funds from?

edit: BTW, with unit trusts, you are looking at the retail charges for these. Typically 5% initial charge and 1.5% annual managment charge. If an IFA chooses to make them available cheaper on their own fund supermarket then that is their choice. If they choose to retail them at the retail price then its their choice. Your choice is whether you go to a different IFA or use that one. There are no fund supermarkets that offer no initial charges or discounts on annual management charges. There are IFAs that do this though but in exchange you accept execution only level of consumer protection.

This is interesting (though maybe not relevant in this case).
Does this mean the IFA can charge upto 5% initial charge and just pass this on to the customer?

How does this work if they know there is somewhere else you can get the unit trust for <5%?

What additional protection do you get for not just going to an execution only broker?

dunstonh

Sorry if I have mixed up any terminology - I was thinking of someone like Hargreaves Landsdown to buy funds from?

HL are IFAs. They discount on what is effectively the RRP for the funds.

I think my 6% was wrong for an upfront charge. I had read 'IFA will receive £5600 at the commencement of bond'. This was from an initial investment of 80K and wrongly assumed this was coming out of the original sum invested (I realise £5600 is actually 7% of £80k).

What you describe sounds like an investment bond and not collectives (what HL are offering). The 7% sounds like a commission rather than an initial charge. That doesnt seem to match the current product though and most investment bonds have higher allocations. e.g. £80k would typically see around 102% assuming maximum commission.

A transaction of £80k is almost certainly going to be cheaper on fee basis or hybrid fee basis than commission.

This is interesting (though maybe not relevant in this case).
Does this mean the IFA can charge upto 5% initial charge and just pass this on to the customer?

In very simple terms yes. If you buy a particular fund direct from the fund house you will pay 5%. The IFA can retail that fund upto 5%.

How does this work if they know there is somewhere else you can get the unit trust for <5%?

The only way to get that fund cheaper is to use another IFA. HL for example are IFAs.

What additional protection do you get for not just going to an execution only broker?

You cannot complain to the financial ombudsman service about you picking the wrong tax wrapper or investments as you are taking responsibility for that.

That is quite important as at the moment it appears you are comparing an investment bond on old contract terms against collectives.

Texas_Pete

dunstonh wrote: »

What you describe sounds like an investment bond and not collectives (what HL are offering). The 7% sounds like a commission rather than an initial charge. That doesnt seem to match the current product though and most investment bonds have higher allocations. e.g. £80k would typically see around 102% assuming maximum commission.

You're quite right it is an investment bond - with an initial allocation of 102% (i think) of initial investment.

As i said earlier it's not my policy but seems a strange choice of investment given some access to the cash may have been required but this product has a whole bunch of tie-ins that go on for 6 years.
What are the advantages of the investment bond over collectives?

dunstonh wrote: »

A transaction of £80k is almost certainly going to be cheaper on fee basis or hybrid fee basis than commission.

fair enough not much point dwelling on that now I suppose.

dunstonh wrote: »

In very simple terms yes. If you buy a particular fund direct from the fund house you will pay 5%. The IFA can retail that fund upto 5%.

I realise this isn't to do with the investment bond mentioned above but isn't this a bit of a conflict of interest if working on a commission basis?
A commission could be taken for something that could be bought cheaper elsewhere?

willt

The IFA ha a right to charge a fee or commission if they've given you good advice, you wouldn't expect a solicitor to tell you how to arrange your own conveyencing or divorce. Although the IFA has a duty to provide advice based on a suitable product, it has to be remembered that at the end of the day they are salesman

dunstonh

I realise this isn't to do with the investment bond mentioned above but isn't this a bit of a conflict of interest if working on a commission basis?
A commission could be taken for something that could be bought cheaper elsewhere?

The first thing you need to realise is that at the moment the products have effectively got a recommended retail price. That is the starting point. Like any retailer of products, they can choose to retail them cheaper. The starting point isnt another IFA that markets the products at a discount.

Take invesco perpetual high income. That fund retails at 5% initial charge and 1.5% AMC. An IFA taking typical maximum commission can still retail it cheaper than direct at 3% initial charge. If the IFA doesnt want to be paid they can retail it at nil initial charge. However, if you choose to pay on commission basis and not fee basis then the IFA will take the pay from the product. You have to pay by one means or another. It will still be cheaper than buying direct though.

It doesnt matter if it can be bought cheaper through another IFA. You dont get to the checkout in Tesco only to be told they will only sell you 26 of your 50 items as you will need to go Asda and Morrisons for the rest.

What are the advantages of the investment bond over collectives?

Pros and cons but not that much of a difference nowadays. Mainly higher rate taxpayers benefit more from investment bonds historically. Those aged over 65 with income close to £21,800. Those requiring trusts. Those wanting to protect their investments from local authority care means test. Those that want to use their CGT allowance elsewhere or dont want to be bothered with CGT tax calculations etc. The reasons nowadays are not as strong as they were 5 or so years ago.