Endowments - Where did it go wrong?

dunstonh

Although......I do have to say, commission is a cost to the consumer.

It is not the measure of costing a product though. You dont buy a washing machine on the basis of which retailer makes the most profit from it. You look at the cost of the product. There are plenty of providers that pay lower commissions but have higher charges than the higher commission payers. The focus should be on cost not commission.

If you look at the actual charges of the products and compare that to the commission paid, you will see that the charges were significantly higher than the commission. Compare that to modern charges where they are a fraction of the size.

If, say, a mutual paid high commissions to advisors, then the mutual would bear the cost of this.This would have the effect of reducing their funds, which directly affects the payouts to members (i.e. the consumers).

Depends on the mutual and the contract. Standard Life got into trouble a few years back by hiding some of their charges in the fund. However, the product had charges as well. When both were taken into account, it was more expensive than unit linked contracts which are more visible with their charges.

Also, not all IFA's are are professional as yourself. Could you put your hand on your heart, and say that no IFA has ever pushed a product based on commission?

Nope. However, things are much improved. IFAs only account for 2% of complaints at the FOS. That has being dropping annually for years. Yet IFAs account for the majority of transactions. The majority of complaints received are about tied agents.

100% fee based advice (which you already do!) is long overdue as standard industry practice.

Its not 100% yet. You still get people where they want to be on commission basis or the transaction is priced better to be on a commission basis. The most popular method by far is agreeing a fee in advance but using the commission to match the fee with any shortfall (if any) being met by cheque and any surplus being refunded or used to offset terms. I do a lot of retirement planning business and using the commission system to pay fees is very efficient as you effectively get tax relief on the fee. That method is liked by the FSA as it removes the perception of bias as the fee is agreed before any product sale or provider is chosen.

tartanterra

Tom_Kelly wrote: »

I have read this thread with a sense of amused incredulity. I am afraid that the only source of the facts quoted seem to have been articles from the 'Mail on Sunday' rather than anything of greater substance or accuracy. I am not an IFA but even I felt like rising to the bait offered.

Bait?

What are you on about?

I think you miss the point of a forum. As a consumer of financial products, having the opportunity to debate with an IFA is actually quite handy for me. It allows me to share my thoughts and also clarify some points.

It's simple, I have laid down my thoughts and dunstonh has (helpfully) given their view as an IFA. I don't really see what's wrong with that - a mutually supportive financial forum allowing open debate and questions, with professionals giving their personal opinion.

You on the other hand, have added nothing constructive, just an insult. (And frankly, I don't know what your on about)

tartanterra

dunstonh wrote: »

It is not the measure of costing a product though. You dont buy a washing machine on the basis of which retailer makes the most profit from it. You look at the cost of the product. There are plenty of providers that pay lower commissions but have higher charges than the higher commission payers. The focus should be on cost not commission.

If you look at the actual charges of the products and compare that to the commission paid, you will see that the charges were significantly higher than the commission. Compare that to modern charges where they are a fraction of the size.

Depends on the mutual and the contract. Standard Life got into trouble a few years back by hiding some of their charges in the fund. However, the product had charges as well. When both were taken into account, it was more expensive than unit linked contracts which are more visible with their charges.

Nope. However, things are much improved. IFAs only account for 2% of complaints at the FOS. That has being dropping annually for years. Yet IFAs account for the majority of transactions. The majority of complaints received are about tied agents.

Its not 100% yet. You still get people where they want to be on commission basis or the transaction is priced better to be on a commission basis. The most popular method by far is agreeing a fee in advance but using the commission to match the fee with any shortfall (if any) being met by cheque and any surplus being refunded or used to offset terms. I do a lot of retirement planning business and using the commission system to pay fees is very efficient as you effectively get tax relief on the fee. That method is liked by the FSA as it removes the perception of bias as the fee is agreed before any product sale or provider is chosen.

Agree with what your saying, but what I'm trying to say about commission based sales is this: High commission is often paid to incentivise the agent into selling that specific product above all others, whether it is the best product or not. Also if the overall cost of the product was high due to the commission, many consumers simply wouldn't know that as they are not comparing charging structures; that is something the expect the IFA to do for them.
I am sure that the vast majority of F.A.'s are above that sort of thing, but it does leave the system open to abuse. Hence the changes to all advice being on a flat fee basis are to be welcomed.

EdInvestor

Another key factor in the failure of endowments in recent years is the lack of tax relief, which ended in 1983.This year was the last one in which 25-year tax relieved endowments matured - and on the whole they appear to have met their targets (albeit producing little, if any,surplus) We won't see that in future with most of the others.

Gorgeous_George

My endowment mortgage cost me more per month than a repayment mortgage.

In 1985 I borrowed £24K. A repayment mortgage would have cost me £326.13 at 16% where as my IO payment was £330 at 16.5% (extra 0.5% for having an endowment). Add to that the £45 monthly endowment premium and I clearly paid more bu having the endowment (excluding adjustment for the insurance benefit).

Today I am wiser and would not sign up to such a deal. At 21, I was easily convinced that I should expect £31K after 25 years (or even 18 years hence the Early Maturity Option). I was told to expect double the sum assured of £31K.

The money 'earned' by the salesman was, I believe, in the order of 15 months premiums.

So, over-generous commissions were the order of the day.

All pyramid scams fail in the end. With endowments, low inflation meant that payouts fell dramatically. This meant less people bought endowments reducing the cash available to fund maturing policy shortfalls, Anyone with a policy today is in for a disappointment.

GG

dunstonh

The money 'earned' by the salesman was, I believe, in the order of 15 months premiums.

So, over-generous commissions were the order of the day.

£45 x 15 = £675. Compared to an overall premium over the term of £13,500. Thats a retail mark up of 5%. Many shops operate on 10% or more.

feisty1

Gorgeous_George wrote: »

The money 'earned' by the salesman was, I believe, in the order of 15 months premiums. So, over-generous commissions were the order of the day. GG

Are we (Independent Advisors) the only people who are expected to work for nothing!

What is the problem with us earning money?

tartanterra

feisty1 wrote: »

Are we (Independent Advisors) the only people who are expected to work for nothing!

What is the problem with us earning money?

I can see this is a tetchy subject!!

No one said you shouldn't earn a fair fee! It's how people are charged and the level of charges that's being discussed.

hearts

lisyloo wrote: »

I think greed is a little harsh.
A lot of ordinary unsophisticated people took these.
When I got mine I was told it was a very "safe" product both by the advisors and the concensus belief among ordinary people.
I did not perceive it as a huge gamble or a greedy move.

I admit that I was naive about these things (when I was 22).
I think a lot of people are naive and didn't understand it fully, but greed is a bit harsh.
I went along with what I was told rather than attempting to understand it.

No No, you misunderstood me. I meant Corporate greed. The buying of these was never a bad thing. I have one myself.
The reason they have fell so heavily, like all other things in the banking sector, was corporate greed. The continual search for bigger and bigger profits. They would invest in anything for the sake of their bonuses. They cared not whether the investments were stable or safe.
Sub Prime US. 6x income in uk. 125% mortgages. Pyramid schemes by respected US institutions.
At the end they would invest in anything that gave a short term gain. The main reason for this, Bonuses in figures the ordinary working man couldn't even dream of. GREED ;-)

Gorgeous_George

To some, £675 may seem reasonable for an hour or two's work in 1985. For me, as a member of the Armed Forces (at the time), it would have been three week's pay.

GG