IFA Question

DaPdS

Hi.

This is a question to any IFAs, I was hoping you might be able to help.

My parents IFA recommended an investment bond. I believe this was done wrongly as they are both basic and non tax payers.

I have read that Investment bonds give IFAs large commissions and are therefore often recommended unnecessarily.

Is there a way I can find out how much commission the IFA received.

According to the Investment Report, the IFA said that he gave up many thousands in commission to enhance our investment. On the statement from Legal and General and Sterling it does not appear that this forgone commission is there. Any idea where I should look for it?

I hear that commissions from Legal and general etc can be negotiateAd, especially with larger investments. Is this possible?

Thanks for your help.

dunstonh

My parents IFA recommended an investment bond. I believe this was done wrongly as they are both basic and non tax payers.

Its less favourable for them than say unit trusts in some circumstances but there are occassions where it can be better even for non tax payers.

I have read that Investment bonds give IFAs large commissions and are therefore often recommended unnecessarily.

I would prefer to re-word that. Investment bonds "can" pay more commission as providers will indemnify 4 years of the fund based trail commission and add it to the initial commission. So, on that basis it pays more up front but it is at the expense of fund based trail (which the provider keeps).

Most decent IFAs will equalise the commissions between bonds, ISAs and unit trusts so there is no commission bias and the FSA published figures go someway to reflect that with initial commission only being 0.5% higher on average than unit trusts.

Is there a way I can find out how much commission the IFA received.

Its on the illustration provided at point of recommendation and its also sent with the cancellation rights and policy documents.

According to the Investment Report, the IFA said that he gave up many thousands in commission to enhance our investment. On the statement from Legal and General and Sterling it does not appear that this forgone commission is there. Any idea where I should look for it?

Look at the initial allocation. That is where the commission rebate would go most of the time (it can also be used to reduce annual management charges in some cases). You can also look at the commission disclosure on the illustrations and see how much was taken as a percentage. 7% is the typical maximum if full initial and no fund based trail. If its less than 7% then that would suggest a rebate.

I hear that commissions from Legal and general etc can be negotiateAd, especially with larger investments. Is this possible?

Some companies you can play against each other for larger investments. Typically those over £500k. Some won't play ball though. L&G are not one that I have ever had success with. Saying that, I tend to get maximum commission enhancements as default so it could be those that are not on maximum commission enhancement as default who need to go to provider to haggle more.

In case you dont follow that, most providers will have a base level commission. Take Norwich Union for example. Theirs is 4% on the bond. However, you can get upto 7.5% without having any impact on the charges to the client depending on what you or your network have negotiated. Those at the 7-7.5% mark are not likely to get enhancements unless its a £500k plus. Those at the 4% mark are more likely to get "manual" enhancements than those that already get them as default.

As for suitability, reasons why a non rate taxpayer could still have a bond are (and these are not all but some of the reasons)
1 - trusts required
2 - lower charges (if commission rebated especially this can bring the reduction in yield (RIY) to under 1% a year)
3 - no impact on personal taxation each year so allows bank/building society interest to be paid gross if non taxpayer
4 - no impact on age allowance (if over 65).
5 - no impact on personal CGT allowance or requirment to buy and sell units each year and complete a tax return.

If it is a larger investment, then there is more chance of those things coming into play.

Only observations I will make is that neither L&G and Sterling are not the cheapest bonds. Both have good fund ranges. Sterling did come out second for me on a recent case on charges but that was due to a special offer boosting it but L&G is almost impossible to come out top as it's own internal fund range has an AMC of 1.3%. You can get NU for example as low as 0.75%.