ISA charges alert

dunstonh

OK, sorry, I thought you hadn't but then not being an IFA I was not aware that this was a common thing...

Many products do it.

Protection products give the choice or level, non-indemnity or indemnity (if held for the whole term, the level option will pay the most but its drip fed on each payment made. Non-indemnity pays less than level over the term but drip fed over 4 years. Indemnity pays the least but pays a lump sum up front with a 2-4 year clawback depending on provider.

Most investment products, including ISAs, Unit Trusts and Bonds have the option to capitise a number of years trail commission to increase the amount paid up front.

So, lets pick an investment of £10k held for 10 years.

option 1 (the one you dont like CC) - advisor is paid £700 with no annual income thereafter
option 2 - reduced initial commission but paid 0.50% fund based annually. So, thats £400 and £50 a year thereafter (ignoring growth to save me getting excel out ). £50 x 10 = £500 plus the initial £400 giving that advisor £900. With investment growth, that could easily be a lot more.

In both of those cases, the charges to the policyholder are exactly the same. In case 1, the product provider is in pocket if you hold onto the product for more than 4 years (4 years being the typical breakeven point). In case 2, the advisor is in pocket if you hold on for more than 4 years but out of pocket if you do it less.

Quite, and I find that reprehensible. It means that what is in the client's interest is unlikely to be the main consideration when giving advice.

Why? The research tools available do not list the commission options or amounts paid.

You also have to remember that different IFAs get paid different commission amounts depending on their turnover. You could see an IFA that gets paid 4% for a product and another IFA that gets paid 7% for exactly the same product on exactly the same terms. So, IFA 1 getting 4% may rebate 2% giving you an extra 2% allocation and keeping 2%. IFA 2 getting 7% could rebate 4% improving your terms but keep 3%. If you only look a the commission being paid, you would see IFA 1 getting less than IFA 2. Meaning you would go with IFA 1 because they got paid less even though IFA2 offered the cheaper product because of a greater rebate.

This is why the commission is not the most important thing to look at but the actual charges.

cheerfulcat

whiteflag wrote:

I totally agree the system is seriously flawed, however no one seems to be able to come up with a viable alternative.

Thank you, whiteflag, that was what I wanted to know. As far as alternatives go, I would suggest that fees are an option but get the feeling that there are too many people in the industry doing too well out of the current system...

dunstonh wrote:

Why? The research tools available do not list the commission options or amounts paid.

I'm sure that an advisor who is influenced by commission payments will have his or her own way of finding out who pays best; in fact, I strongly suspect that the fund providers will themselves furnish this information as, indeed, they did in the original story.

The problem with you two is that you think everyone is as honest as you are :A


Regards

Cheerfulcat

dunstonh

Thank you, whiteflag, that was what I wanted to know. As far as alternatives go, I would suggest that fees are an option but get the feeling that there are too many people in the industry doing too well out of the current system...

If you go fees, you have to pay VAT on them. I prefer to use the hybrid option of agreeing what commission is to be taken and treat it as a fee. This way it avoids VAT. This method is very popular with those on the "new model" basis and I believe that whiteflag has mentioned his preference for this in the past too.

So, for example using a 100k investment.

This would pay commission of £7000 to an advisor (assuming full commission) or £5000 plus 0.5% p.a. fund based on "old model" basis.

On fees, let's say £1,000 plus 0.5% fund based p.a. This would rebate £5000 into the investment and the client pays £1175 fee because VAT had to be added. (often by reducing the investment down by £1175).

Now, the third option uses the commission system but allows the advisor to take that £1000 fee as commission from provider with the remainder going into the plan. This avoids VAT and saves that £175. So the ability to play with the commission system can be beneficial to both sides. No VAT means less paperwork for advisor and savings for the client. All because the VAT man treats commission as non VATable but fees as VATable.

It may not be a big amount that 17.5% but its nice to see the commission system can be used to benefit.

I'm sure that an advisor who is influenced by commission payments will have his or her own way of finding out who pays best; in fact, I strongly suspect that the fund providers will themselves furnish this information as, indeed, they did in the original story.

No doubt you are correct. This is why everyone should ask to see the research leading to the selection of the product provider. You are entitled to it. This will prove two things. One, it is the best product and two, that the advisor has actually researched it to a level you are satisfied with. Remember you are paying an IFA to do that research for you. So, you should see that research and make sure you are getting your moneys worth.

Extractthecash

Does the method of avoiding VAT you mentioned need disclosing to HMRC? - I know Brown is getting clever on making accountants start disclosing schemes. (not sure if it constitutes a scheme and not sure if IFAs need to comply anyway - just a passing thought..)

dunstonh

Extractthecash wrote:

Does the method of avoiding VAT you mentioned need disclosing to HMRC? - I know Brown is getting clever on making accountants start disclosing schemes. (not sure if it constitutes a scheme and not sure if IFAs need to comply anyway - just a passing thought..)

No. VAT on financial services has been a bit of an issue in recent years with a range of services now being charged VAT. The fee option is considered a fee for services and vatable. The hybrid option, as it is paid by the insurer, is treated as commission and not vatable.

HMRC have issued guidelines on when or when not VAT is applicable and commissions have been confirmed as being exempt. By reducing your commission entitlement to a fixed level agreed, you are not technically doing it on fee basis. Even though in reality you are.

Extractthecash

Thanks for the reply, was more of a passing worry when reading your earlier post.

Suppose it also means that you can't claim VAT back on your costs, although as an IFA you probably don't have much VATable expenditure in the first place...

whiteflag_3

cheerfulcat wrote:

The problem with you two is that you think everyone is as honest as you are :A


Regards

Cheerfulcat

No chance of that.My blood pressure is just coming down after finding out today that one of my( as of today) ex clients has been recommended by another IFA to transfer out of a PP I arranged 14months ago with a 0.75% annual management charge to Skandia. Apparently Skandia perform better :mad: :mad: :mad: :mad: :mad:

My ex client got this deal as I took reduced commission initally and the funds are up over 20% already. oh and they had internet access 1/4ly newsletters , 3 A day updates and the offer of an annual review.
:mad: :mad: :mad: :mad:
Now all I have got to look forward to is the balance of the commission to be clawed back :mad: :mad: :mad: :mad:

I would love to be able to claim compensation for my losses but apparently my type are not entitled to the same protection as the general public. :mad: :mad:

cheerfulcat

Hi, whiteflag,

Your experience proves my point, though, doesn't it? The only person to benefit from this new arrangement is the unscrupulous advisor; he gets the commission, while you lose yours and the client is paying a second set of charges on the same money...

EdInvestor

This rather confirms Ned Cazalet's recent point about so called "new business" in the life sector actually being old business just recycled round the system.

There's no way the insurers can afford this merry-go-round any more - they are losing money on pensions overall and paying out big commissions on business that gets cancellled before they can make any money.

What else are they supposed to do but claw back the commission?

Something's got to give.The distribution system business model just doesn't work any more. I think they call it "cannibalisation".

whiteflag_3

cheerfulcat wrote:

Hi, whiteflag,

Your experience proves my point, though, doesn't it? The only person to benefit from this new arrangement is the unscrupulous advisor; he gets the commission, while you lose yours and the client is paying a second set of charges on the same money...

Thats why I agreed the system was flawed.

In this case because of the way I arranged the plan there were no initial charges, therefore the the only cost for the client are the charges going into Skandia and then of course their double charges going forward.

The commission clawback doesnt really both me, what I am really really angry about is that after all that has gone on in our industry and all the FSA preaches, the public still appear to be easy prey for churning bandits.