L&G FMISA - 'Other' fees

Timmaa

I'm pretty disappointed with the L&G and thought this might be worth mentioning to others.

When taking the plunge into the housing market in July 2001, my wife and I decided to get an IO mortgage and put the capital repayments into S&S ISA's. We were quite young and green at the time, and used a financial advisor. We went for the L&G FMISA because the life and critical illness product that ran alongside the ISA was a great deal and it suited our requirements at the time. We had no dependents and had a policy to cover the remaining balance on the mortgage. The advisor obviously has his slice of commission from this which is 'paid by L&G' and amounted to £5.28/month for the first 38 months and then £1.25/month to EOT.

In 2006 we decided to move house so I took it upon myself to arrange an extension to this policy. I contacted L&G directly and arranged an add-on agreement under the same ISA wrapper. I doubled the monthly payments but the insurance element didn't need to be as large. I did this without financial advice and so the T&Cs of this agreement had some subtle but not insignificant differences. Perhaps this is due to a variation in L&G's T&Cs between 2001 and 2006, and perhaps it's due to the commission that L&G don't have to pay.

Now that we have children, we decided to review our insurance requirements as the next fiscal year approached. We need to increase our cover levels to make sure the kids are looked after should the worst happen in the short term. The insurance market has also changed in recent years and the product may no longer be competitive. It was whilst making notes of our current payments that I noticed a significant difference between the policies. Naively, I had assumed that the T&Cs for both sub-agreements would be the same. Clearly they are not.

The difference is in the 'other' fees in Key facts documentation. Conveniently these are not detailed other than to say they are 'other' fees.
In the commission paying agreement, they amount to £1.96/month. In the agreement that doesn't attract commission, £0.17/month.
There is also an 'administration fee', which is £1.00(maximum)/month and £0.00/month respectively.

I think it's very likely that I will now transfer all my S&S ISA dealings to a broker like H&L where there is a little more transparency (and flexiblity with fund purchases) and take up a standalone insurance policy for myself and my wife.

dunstonh

I think it's very likely that I will now transfer all my S&S ISA dealings to a broker like H&L where there is a little more transparency (and flexiblity with fund purchases) and take up a standalone insurance policy for myself and my wife.

Going DIY requires less disclosure than when getting advice. So, whilst you are now planning the right thing, if you intend to go DIY then you need to realise that the onus is on you to know what you are doing and now much things cost. Even today, there is no requirement for S&S ISAs to issue illustrations. Although most advice ones will. DIY do not.

Timmaa

Hi dunstonh,

I accept your point about responsibility and am comfortable with it. I don't hold anything against the financial adviser, who I feel gave us good advice. But I found he covered himself quite well against any comebacks with a standard 'summary of advice' document, which detailed all the things he should have advised, even if there were a couple of details he forgot! Consequently I don't feel there is any value in the notion that there is a theoretical 'weight of responsibilty' on the IFA's shoulders.

I would also say that the 38x£5.28 plus the 202x£1.25 (£453.14) that the IFA will receive over the life of the 20 year policy is a little on the 'chunky' side, especially when you consider my wife's parallel FMISA attracts the same levels of commission. The total at end of term will amount to ~1.5% of the target maturity value. Not bad for what was essentially a couple of hour's work for one man. I would rather what is left of that went into my ISA than their pocket.

Your point about the S&S ISA's illustrations is valid but amounts to no more than simple maths in the case of the advice and summary statements I receive regularly. I'd suggest that the majority of the people on this forum would be able to calculate the same projections.

I guess my main gripe with L&G is that despite the documentation stating that L&G pay the commission it appears that I do, under the blanket of some none descript 'other fee'. I feel they should be more honest about that.

dunstonh

Consequently I don't feel there is any value in the notion that there is a theoretical 'weight of responsibilty' on the IFA's shoulders.

It sounds like you used an FA, not an IFA.

I would also say that the 38x£5.28 plus the 202x£1.25 (£453.14) that the IFA will receive over the life of the 20 year policy is a little on the 'chunky' side, especially when you consider my wife's parallel FMISA attracts the same levels of commission.

Whilst it seems expensive for the level of premium, it is only £653.78 and paid on drip. When you consider the costs of business, that is really at the bottom end of affordability as far as an IFA is concerned, although FAs would typically still do it.

Not bad for what was essentially a couple of hour's work for one man.

If it was only that....

I guess my main gripe with L&G is that despite the documentation stating that L&G pay the commission it appears that I do, under the blanket of some none descript 'other fee'. I feel they should be more honest about that.

That is not really any different to HL. Actually, HL are being less transparant as they are getting the adviser cut of around 0.5% and only rebating 0.1-0.2%. They also get the platform cut as distributor and hidden fund rebates and marketing payments. It is quite possible that their model could be banned in July by the FSA (and the other platforms doing the same).

As I said, I don't disagree with what you are doing necessarily but do not think that what you are moving too is any more transparent.

Timmaa

Hi dunstonh,

Thanks for taking the time to reply. I'm intrigued by this comment:

That is not really any different to HL. Actually, HL are being less transparant as they are getting the adviser cut of around 0.5% and only rebating 0.1-0.2%. They also get the platform cut as distributor and hidden fund rebates and marketing payments. It is quite possible that their model could be banned in July by the FSA (and the other platforms doing the same).

From what I've saw on the H&L website, I understood that the L&G funds we currently hold are part of a set that pay renewal commission to H&L. My initial thoughts were to set up regular monthly payments into the ISA to the same unit trusts. Consequently my 'other' fees would fall to reflect the AMC, meaning any commission cut would truly be paid by L&G. My whole monthly instalment would go towards fund purchase less AMC, which I would get some kickback from as part of the H&L bonus scheme. Are you saying this won't be the case?

dunstonh

Consequently my 'other' fees would fall to reflect the AMC, meaning any commission cut would truly be paid by L&G.

Currently, you pay the AMC. Out of that the commission is paid (like it is with your existing ISA manager). The saving is any initial charges. However, in addition to the charges you pay, HL get marketing payments/rebates from the fund houses (Which is why you should take their marketing with a pinch of salt). You dont see those as they are paid behind the scenes. The "bundled" platforms keep it hidden. This is not considered by many to be correct as all the fees and remuneration should be transparent. If bundled platforms are being paid hidden amounts and you are not getting them then its not fair. The "unbundled" platforms rebate it to you or lower their AMC to reflect the rebate. The hidden rebate is one of the things that may be outlawed in July (the FSA paper is June/July but the action wont be until the end of 2012). Without the hidden rebate, the bundled platforms would have to charge explictly. Plus, the likes of HL will not be able to keep the IFA/FA commission as they currently do without doing something for it as trail commission will have be justified post 2012.

I would suggest you keep an eye on the platform news around Summer time. Its a really close call at the moment as to whether bundled platforms will win or unbundled platforms will.

Timmaa

Then how is it that I am paying more fees for one 'sub-ISA' than the other? A commission on the life and critical illness cover element of the FMISA?

dunstonh

Timmaa wrote: »

Then how is it that I am paying more fees for one 'sub-ISA' than the other? A commission on the life and critical illness cover element of the FMISA?

Perhaps you didnt use an IFA but used an FA. L&G increased the charges on their funds for the FA distribution channel but IFAs use the retail funds or institutional funds (which are lower cost).

Perhaps the version changed between initial set up and increment. That is quite common.