commission v fees

dunstonh

The post further states substantially that initial investment charges will average about 0.5% and, thereafter, 1%. If it smells like commissions, then it probably is. What do you think it is?

It "smells" like an annual management charge for the investment funds. Every investment fund has an annual management charge. The percentage varies but it exists.

I said "wrap fee" product. According to initial post, an establishment charge (misnomer) of 0.625% is charged every quarter for the first five (5) years. Is that not 2.5% per year? That is basically an annual management fee and is known as a wrap fee because all other charges should be included in that fee, such as commissions for selling/buying.

There is a 7% initial allocation. You need to factor that in as well. The AXA contract, in this form, is a multi-charge contract which effectively gives with one hand and takes back with another. Its probable that the 107% allocation if growing at 6% per annum equates back to that 2.5% a year for the 5 years. With such a high establishment charge, I would prefer to remove that by reducing/removing the higher initial allocation. However, the end result would not be much different.

Having a wrap fee of 2.5% should mean that investment charges are included. If they are not, then it is DOUBLE DIPPING, which is unethical by any standards.

There is no wrap fee of 2.5% though. Just an establishment charge which exists because of the 107% allocation. So nothing unethical there.

Offshore investment bonds cost more than onshore or unit trusts. They havent had the same drivers in the market to bring the charges down that the other tax wrappers have had. Establishment charges and quarterly fees are commonplace still. So a straight line comparison with unit trusts makes them look very expensive. However, we need to factor in tax as well and then look at the bottom line after tax and charges.

Eds example would result in lower charges. Not to the level Ed suggests as Ed has totally ignored the annual management charges on the unit trusts whilst including them on the investment bond. The investment bond, on like for like terms with unit trusts (ie equal commission on both for a fair comparison - not low cost distribution vs full cost) would be around £5000 a year more expensive. However, the unit trusts would wipe out the age allowance, around £450 a year, create a potential CGT liability (hard to calculate that one but 10% growth is £50k against an allowance of £8800) and an IHT liability of around £200k. The bond also benefits from gross roll up.

So, that £5000 extra in charges is almost certainly wiped out with savings on CGT, age allowance and gross roll up. Then you have the IHT saving of upto £200k

What was incorrect information? The gist of the post was not whether the OP should go offshore or not or even whether the settlor should try to avoid IHT for the beneficiaries benefit or not - but whether the charges are reasonable. I believe you also stated that they could do better.
Please correct if I am wrong. I like your comments.

Its not so much aimed at you, although your assumptions are a little incorrect as highlighted. However, the trend from the non industry posters on this thread is that the advice is wrong and that the adviser shouldnt be paid for the work and that the advisers here are wrong as well. The advisers posting arent being paid a penny for this. We have also spoken out against poor advice in the past when we have seen it. So, why should this thread be any different?

Yes, the OP could get it cheaper. I would only take £5000 of that commission and rebate the rest but thats my business model. The advice could well be the same (maybe a different provider but thats more likely linked to the comm rebate and charging structure). The squabbling over what is effecively 2% of the investment when we are looking at 40% of it being lost to the Govt if nothing is done seems daft.

prudryden

Very well explained. £5000 is a reasonable charge.

Tiggs_2

prudryden wrote:

Very well explained. £5000 is a reasonable charge.

its not a charge, its a commision.

a reasonable charge would be £200 per hour, maybe 10 hours work? £2k


a reasonable commision comes down to what the person wanting the plan sold is prepared to pass on to get that done. thats sales.

one can argue that financial products shouldnt be "sold" at all but where they are there is a very loose connection between commision earnt and resonable charge. dunstonh is probably closest to it simply because his commision is low.

like any sales job, if it were easy to sell £500k investments the commision would be low, its not though - hence saleman are rewarded.

if my clients looked at my commisions to work out if they were reasonable for the work done they would probably conclude they are not - luckily for me they are all well aware that its a commision for having sold the plan and not a payment for work done............and that will ALWAYS be the gap between commision and fees.


my point being that you can not look at the earnings of the adviser to calculate the quality of the advice in a simple way.....unless you go fee based. Anything else is just haggling some money off, fine if thats how you wish to select your adviser.

jem16

EdInvestor wrote:

Perhaps someone would like to provide some figures for the bond performance including the effect of annual withdrawals after 10 years? Otherwise it's impossible to make a proper comparison.

Fortunately those more knowlegeable than me have now provided those figures.

Have you had a chance to work yours out yet?

EdInvestor

Haven't seen the figures yet.I'm looking for the value of the 500k bond after 10 years, assuming 4% annual capital withdrawals and investment in a mix of equities, commercial property and bonds or cash, including a deduction for any chargeable gain on encashment.

jem16

Why is it necessary for you to have figures for the bond before you can give the figures I asked for? Presumably you already know what the bond would return otherwise you wouldn't have said this;

"a proper investment would give the estate [net of IHT @40%] as much as double what it would be if the bond/trust was used even assuming 5% pa income."

Please give an example of what your proper investment would achieve. You can base it on your above mix if you like.

prudryden

(n) charge (the price charged for some article or service). It's a charge against the estate - whether it was charged as a gratuity, fee, wage, commission, mark up, mark down, time-sensitive, quality sensitive.

What was your point again about fees vs. commission? I find that debate very exciting as does the FSA and SEC. Fee based business is a hot potatoe in the US, which means it will be coming here soon. Too many firms do nothing for their annual fees. They may look at a portfolio near the end of the year if they have time.

EdInvestor

Why is it necessary for you to have figures for the bond before you can give the figures I asked for? Presumably you already know what the bond would return otherwise you wouldn't have said this

I need to know the target because obviously one wants to keep the investment mix as low risk as possible with a very elderly person.

With 4% withdrawals from capital, the bond will lose 200k over the 10 years, but it's not a stratight calculation, because as this money goes out, less and less is invested, so the return is lower and lower as times goes by.In addtion there is the chargeable gain at the end.

I don't have the software to calculate these deductions,but we are talking about very substantial charges here as well, likely to be more than the income the bond is earning, plus taxes on the capital gains, so I don't think the target is too demanding once you get the charges and the taxes out of the picture, which is quite easy to do.

Tiggs_2

prudryden wrote:

Fee based business is a hot potatoe in the US, which means it will be coming here soon.

cant see it myself....there are simply far too many peole in the UK that wont EVER pay a fee for financial advice. As such there will always be a need to renumerate people for selling it to them.

if legislation takes away the renumeration (because the provides wont) then the sales will just cease - and the public will suffer...thepublic certainly wont suddenly rush out and retain the services of a fee based adviser any more than they will opt to buy a stakeholder just because they are cheap.

Tiggs_2

EdInvestor wrote:

I don't have the software to calculate these deductions,but we are talking about very substantial charges here as well, likely to be more than the income the bond is earning, plus taxes on the capital gains, so I don't think the target is too demanding once you get the charges and the taxes out of the picture, which is quite easy to do.

Highly assumptive, i know many people invested in the way the OP is heading who have made significant gains, despite the market drop a few years ago, while taking their 5% withdrawls from bonds.

The notion that 4% withdrawl, plus charges, PA will deplete capital on a diverse £500k over the long term is simply not something you can state as "likely"