standard life or hagreaves landsdown sipp

jem16

whambamboo wrote:

Of course, the idea that trail commissions are a payment to the ongoing service is somewhat misleading, as there is no reason why the advisor should not receive a larger upfront payment instead, as advance payment for future growth. The commission model IMO simply hides the true cost of commission.

Personally I would rather pay an adviser trail commission rather than an upfront payment. At least that way the adviser would be working with my interests at heart as he gets 0.5% of my fund - the more he makes for me, the more he gets.

If an upfront payment is made, there is no incentive for ongoing servicing as he's already got his money.

dunstonh

To clarify, is this commission effectively never taken out in the first place? Do you opt out of receiving it? Or does it have to be paid back in to the pot?

The intial charge is reduced to 1.2% from 5.2%. The contract note will show 1.2% as the initial charge.

It is a trail commission, but the money that it comes from is not a management charge: it exists purely as a commission charge for the referrer. The 0.5% of the fund is a commission for the seller of the product.

The trail commission is paid out of the annual management charge. The AMC is the retail price (RRP effectively). Out of that the 0.5% is paid to the advising firm with the rest going to the platform and the fund house. Platform would be HL or Selestia in this case.

No I didn't say they were. When I said total commission paid, I meant "total commission received by the adviser", I wasn't saying it was paid by the commission was paid by the investor: I was saying that the investor was having £94,800 invested, while the IFA was receiving £8,250 from the pension company (which is more than the total paid in by the investor). If £5,200 in charges is paid, but you receive £8,250 in commission, then there's more money in the fund on day 1 than the investor actually paid.

That assumes that the 0.5% is indemnified and paid up front. That is old model commission basis and not desirable. The actual initial commission remains 4% (or 3% if no deal negotiated). The extra bit is the indemnified and can be clawed back. That would never be rebated as it would be business suicide.

This was based on my assumption that you were taking the capitalised commission rather than trail commission.

You wouldnt do it on a discount model and you wouldnt do it on the NMA model. Only the old model greedy commission takers would want it on that basis.

So this means that the product is unsuitable for people making ongoing contributions I assume. So for a person looking for a pension to make regular contributions to, this product is unsuitable (are there any others).

I dont see that. If it takes around 3-4 years to cover the initial charge to compare it to HL, then as long as you have more than 3-4 years, you will be in pocket.

Of course, the idea that trail commissions are a payment to the ongoing service is somewhat misleading, as there is no reason why the advisor should not receive a larger upfront payment instead, as advance payment for future growth. The commission model IMO simply hides the true cost of commission.

If the provider pays around 4 years worth of trail commission up front, then after the 4 years, the provider than keeps the trail commission for themselves for the remainder of the contract. Whether the commission is indemnified or on trail basis, the cost the policyholder is the same.

As Jem says, the adviser has more buy in to an advised product if the trail commission is paid rather than a one off payment up front.

Anyway, I guess it all goes to show that HL are charging too much money - they have a max charge of £200 per annum on non-commissioning funds, but do not cap the amount of commission they take on commissioned funds. More competition will presumably come.

Businesses have to make a profit and they do it with a very good low cost model. They do also have the benefit of receiving the trail commission and the commission for running the platform (assuming they dont contract that bit out).

whambamboo

btw, I think an up-front commission rebate model is more attractive for the investor from a marketing perspective:

5.2% contribution charge to the investor. You get your 4% commision rebate, so the investor pays 1.2%

Then if you take the upfront capitalised trail commission of 5.25%, and keep 1% for yourself, and rebate the rest, then the investor has:

100%
- 5.2% contribution charge
+ full 4% commission rebate
+ (5.25% - 1%) capitalised trail commission rebate

= 103.05% on day 1.

It would be obvious to any investor that this beats Hargreaves Lansdown hands-down - you put in £100,000, but £103,050 is actually invested - the investor receives £3,050 'free' (of course this is actually simply a case of the investor selling his right to commission rebates, and depending on the investment time frame, the investor could be better off getting the ongoing commission rebate instead, but by getting the money upfront it is made plain that you are better off), and the IFA receives £1,000 commission.

Are there any strings attached to the capitalised commissions? Would they want their commission back if the investor switched from a 1.5% charging fund to a lower charging fund?

With clients you have dealt with on this basis, how long are you expecting to receive trail commission for?

Presumably it has to be quite a few years: even though a 0.1% annual rebate for 10 years is the same as a 1% upfront rebate, but I guess the added admin costs of 10 annual payments makes 1% upfront a better option.

It's interesting, btw, to note the true cost of commission: these lovely people:

http://www.75bps.co.uk/

"With effect from 1 January 2007 we will increase the annual management charge (AMC) on the Retail classes of our funds from 1.25% to 1.50%. These extra 25 basis points go directly to you, the adviser, as extra renewal commission."

pay 3% initial commission and 0.75% trail. Over 40 years, the 3% initial commission is dwarfed by a 30% trail.

So if an IFA were to persuade me to start a pension for a new-born child in this fund, over 68 years (assuming this would be the eventual retirement age), then the commission paid would be equivalent to 3% initial + 51% ongoing - 54% total. So if the commission were paid into the fund instead of to the advisor, then if you invested £100k you're effectively handling over £54k to the advisor on day 1.

It just goes to show the power of compounding over a long period. One wonders how much the extra 0.25% commission affects the unscrupulous advisor's decision-making process. Obviously he's thinking more about the potential of extra payments, which adds up to lots of money for him.

I personally think investors should avoid *all* commissions to advisors - the advisor needs to get paid for the work he has done, so ultimately he will get his money either from trail commission or by upfront payment. It makes no difference either way in the sense that the advisor is not doing anything out of the goodness of his heart - he needs to earn a living. So if commission is not paid, and instead the client pays an explicit fee, not only does it not cost the client any more money (as at the end of the day the advisor always gets paid whether the payment is upfront and visible, or behind-the-scens in the form of commission), but he should get a better service which is not influenced by slimey advisers ripping their clients off by selling them products designed to pay them the most money.

Clearly 'free' advice is nothing of the kind, but unfortunately this is unlikely to change as the financial industry is very happy to hide all the costs, as clients simply aren't prepared to pay a professional fee for a professional service, so instead they let themelves be blinded by smoke and mirrors and hidden fees (if the advisor receives a commission, then that is nothing other than a payment by the client).

Just as the person going to his local bank for investment advice is paying a hidden fee to the bank for their products, so too is the investor getting 'free' advice from an IFA.

Ultimately this is why people don't trust the financial services industry, as there are far too many people involved in it who are receiving commission payments (which the client cannot opt out of in many cases, even if directly investing or paying a professional fee), which create an immediate conflict of interest between client and adviser.

Not that HL is exactly exempt from this. One of their PR guys said re upfront commissions of 20% paid by the Pru:

According to Tom McPhail, head of pensions at broker Hargreaves Lansdowne: 'The insurers have a moral and a regulatory responsibility to treat their customers fairly. Offering 20% commission is not consistent with this responsibility.'

Yet as I'm 24 now, if I retire at 65, then I will have paid 20.5% commission (41 years at 0.5% pa) on an initial investment now to HL by the time I retire.

whambamboo

dunstonh wrote:

No I didn't say they were. When I said total commission paid, I meant "total commission received by the adviser", I wasn't saying it was paid by the commission was paid by the investor: I was saying that the investor was having £94,800 invested, while the IFA was receiving £8,250 from the pension company (which is more than the total paid in by the investor). If £5,200 in charges is paid, but you receive £8,250 in commission, then there's more money in the fund on day 1 than the investor actually paid.

That assumes that the 0.5% is indemnified and paid up front. That is old model commission basis and not desirable. The actual initial commission remains 4% (or 3% if no deal negotiated). The extra bit is the indemnified and can be clawed back. That would never be rebated as it would be business suicide.

Do you mean that the capitalised (one-off) trail commisison of 5.25% Equity/Managed funds, which can be paid instead of a 0.5% annual payment is not guaranteed? I.e. they pay you it now, but if the client leaves the fund after six months or something, then they want it back off you? Whereas the 4% initial commission (paid out of the 5.2% charged to the investor) is guaranteed?

Surely if the commission of 5.25% was partly rebated by you into the fund, they'd just be able to reclaim it out of there?

So this means that the product is unsuitable for people making ongoing contributions I assume. So for a person looking for a pension to make regular contributions to, this product is unsuitable (are there any others).

I dont see that. If it takes around 3-4 years to cover the initial charge to compare it to HL, then as long as you have more than 3-4 years, you will be in pocket.

That's not what I said. You're referring to length of investment, but I was referring to someone wanting to make regular payments (rather than just sticking in £100k upfront). You said £1,000/month contributions would not be worth your while. So therefore it's not suitable for a person wanting to m ake regular contributions.

EdInvestor

Yet as I'm 24 now, if I retire at 65, then I will have paid 20.5% commission (41 years at 0.5% pa) on an initial investment now to HL by the time I retire.

Cheap.That's less than half what you would normally be charged for a conventional pension over the period.

It just goes to show the power of compounding over a long period.

Quite so.

dunstonh

Are there any strings attached to the capitalised commissions? Would they want their commission back if the investor switched from a 1.5% charging fund to a lower charging fund?

No. However, if you moved provider, there would be a claw back.

With clients you have dealt with on this basis, how long are you expecting to receive trail commission for?

I dont do any on capitalised trail. I dont agree with that method of remuneration. Those that have done it on no initial with 0.1% fund based (instead of the 0.5%) on execution only terms are mostly 20-30 years.

Presumably it has to be quite a few years: even though a 0.1% annual rebate for 10 years is the same as a 1% upfront rebate, but I guess the added admin costs of 10 annual payments makes 1% upfront a better option.

But its not a 0.1% rebate. Its a 0.4%p.a. rebate.

I personally think investors should avoid *all* commissions to advisors - the advisor needs to get paid for the work he has done, so ultimately he will get his money either from trail commission or by upfront payment. It makes no difference either way in the sense that the advisor is not doing anything out of the goodness of his heart - he needs to earn a living. So if commission is not paid, and instead the client pays an explicit fee, not only does it not cost the client any more money (as at the end of the day the advisor always gets paid whether the payment is upfront and visible, or behind-the-scens in the form of commission), but he should get a better service which is not influenced by slimey advisers ripping their clients off by selling them products designed to pay them the most money.

So you want direct providers like HL to keep the trail commission but not advisers? That isnt logical.

There are ongoing costs involved with transactions and it is not all one off. You have a lifetime of liability, ongoing FSCS levies etc, staff costs, document storage. With advice cases, you have ongoing servicing, rebalancing, reviews etc.

That's not what I said. You're referring to length of investment, but I was referring to someone wanting to make regular payments (rather than just sticking in £100k upfront). You said £1,000/month contributions would not be worth your while. So therefore it's not suitable for a person wanting to m ake regular contributions.

The contract isnt currently designed for regular premums. It is designed for annual payments, transfers and consolidation. The current process for £1000pm is not economical for me to offer it on 0.4%p.a. rebate terms. So I wont. If they introduce a direct debit facility, then I would.

whambamboo

jem16 wrote:

Personally I would rather pay an adviser trail commission rather than an upfront payment. At least that way the adviser would be working with my interests at heart as he gets 0.5% of my fund - the more he makes for me, the more he gets.

If an upfront payment is made, there is no incentive for ongoing servicing as he's already got his money.

I'm not sure. It doesn't represent a fair means of payment.

If I go to an IFA to get advice on how to invest £100k in a pension now, in 40 years time, I will have paid £20,000 (at today's money) in commission to him.

This is plainly absurd. The fund managers are already being paid to manage the money, and servicing should be paid for as needed.

I'm not going to pay a dentist every month even if I don't need a checkup (yes I know you can get dental plans, but these insure against more costly treatments), so why should I do that to IFA? And the dentist doesn't get variable monthly payments depending on what sort of filling he puts in, even if the cheapest one is the best.

whambamboo

dunstonh wrote:

I dont do any on capitalised trail. I dont agree with that method of remuneration. Those that have done it on no initial with 0.1% fund based (instead of the 0.5%) on execution only terms are mostly 20-30 years.

If it's nearly all being rebated to the client it's not so much your remuneration as the client's rebate.

Presumably it has to be quite a few years: even though a 0.1% annual rebate for 10 years is the same as a 1% upfront rebate, but I guess the added admin costs of 10 annual payments makes 1% upfront a better option.

But its not a 0.1% rebate. Its a 0.4%p.a. rebate.

Sorry poor use of language again. It's a 0.1% PA commission paid to you. That's equivalent to 2% upfront commission. I was discussing which results in higher profit for the adviser.

So you want direct providers like HL to keep the trail commission but not advisers? That isnt logical.

No, I criticised HL as well. There shouldn't be hidden costs like this, the true cost of the service should be charged to the client in both cases.

There are ongoing costs involved with transactions and it is not all one off. You have a lifetime of liability, ongoing FSCS levies etc, staff costs, document storage. With advice cases, you have ongoing servicing, rebalancing, reviews etc.

For advice cases you charge for ongoing servicing the cost of the service. The lifetime of liability is the same as anything else in the world: a doctor has a lifetime of liability for performing an operation, Tesco has a lifetime of liability when it sells me a hairdryer. The risk is priced into the initial sale cost. Nobody else operates like this if they're not providing an ongoing service.

The contract isnt currently designed for regular premums. It is designed for annual payments, transfers and consolidation. The current process for £1000pm is not economical for me to offer it on 0.4%p.a. rebate terms. So I wont.

Indeed, so as I said:

"So Selestia only works out cheaper if you're only transferring a lump sum and then not making any more contributions"

You've said HL's SIPP is more expensive than IFA-sold products, but your alternative offered is only viable if you have a large sum to invest and don't want to continue to make payments, so actually HL's SIPP is a good product for a large number of people looking to make their own investment decisions

jem16

whambamboo wrote:

I'm not sure. It doesn't represent a fair means of payment.

If I go to an IFA to get advice on how to invest £100k in a pension now, in 40 years time, I will have paid £20,000 (at today's money) in commission to him.

This is plainly absurd. The fund managers are already being paid to manage the money, and servicing should be paid for as needed.

The trail commission is not being paid to the IFA to manage the fund - as you say the fund manager is doing that. The servicing is being done by the IFA on my investment for which he is paid the trail commission. For example 12 funds may be chosen initially based on my risk profile. At the end of the year, the funds have performed differently and may now be out of synch with my profile and I may end up losing more than I would be prepared to risk. Therefore rebalancing would be necessary to get my investment back in synch. Or a new fund may arrive on the market which may be better suited than one I already have.

This may require 5/6 hours and the IFA gets around £500 for his work. I don't see that as absurd as I don't have the time or expertise to do it myself.

I'm not going to pay a dentist every month even if I don't need a checkup (yes I know you can get dental plans, but these insure against more costly treatments), so why should I do that to IFA? And the dentist doesn't get variable monthly payments depending on what sort of filling he puts in, even if the cheapest one is the best.

Not exactly the same scenario is it? I go to my dentist every 6 months and pay her for her work at the time. That cost will vary depending on what needs done.

westy23

blimey my head hurts now,
i only wanted a go with standard life or hargreaves lansdown.
but thanks too all for the replys,
anyone got a aspirin.