Cash down the drain as sneaky IFAs pocket money

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MANY financial advisers are raking in thousands of pounds a year from investors they no longer serve, thanks to a gap in new rules banning commission.

New commission payments from fund providers to advisers were outlawed when the retail distribution review (RDR) took effect on 31 December. But so-called “trail commission” agreed before that date can still be paid out – even though many investors won’t realise they are giving money to advisers they no longer use.

The annual trail fee comes out of the individual’s investment and usually amounts to around 0.5 per cent of the fund value every year over the lifetime of the product.

So if you have £200,000 in an investment bond and you’re paying 0.5 per cent trail commission, you’re giving the adviser £1,000 a year from your investment – quite possibly for doing nothing. Over the long term, that can eat significantly into the investment returns.

“Trail commission has been a major industry issue for some time, and will continue to be,” said Tom Munro, owner of Tom Munro Financial Solutions in Larbert. “Paying, say, 0.5 per cent a year where no ongoing service is being provided is madness.”

The confusion is created by the fact that while trail commission can no longer be paid on new investments (although it can be paid on new protection insurance products), advisers can still get payments agreed prior to that. With some £1.5 billion a year paid out in trail commission on past sales, it’s little wonder that a number of unscrupulous advisers and fund providers are neglecting to get in touch with clients for fear of losing that lucrative income stream.

There’s nothing wrong with trail commission in itself. Some investors will be paying it having agreed to do so with their adviser, perhaps to reduce their upfront charges.

The problem is that although trail commission is designed to cover an ongoing service, advisers can receive it even if they have nothing more to do with the investor or their investments. That means people are having money taken from their investments to pay for a service they don’t receive, even after the RDR is in force.

Some fund providers, including M&G, Schroders and Jupiter, have moved to stop trail commission payments on re-invested income. But in cases where the investor may not realise they are paying commission, there is little incentive for the adviser to inform them, as the trail commission is lost if the investor decides to switch out of the product.

Simon Lloyd, chief Investment officer at Murray Asset Management, said the fact that advisers can get commission for previous work goes against the spirit of the recent changes. “It used to be the case that the sale was the action rewarded – so the reward [the commission] was given by the fund management company to the adviser who made the sale, advising his client to buy that particular manager’s fund,” he pointed out.

Now it should be the strategy the adviser puts in place that’s rewarded, regardless of the underlying investments chosen. “The adviser is encouraged to continue to play an active role, ensuring that the investments continue to meet client needs; and the managers of the underlying investment funds continue to be rewarded for their performance,” Lloyd added.

Advisers can still take payments for ongoing service in a similar way to trail commission, although it’s now packaged as an advice charge or fee and has to be agreed upfront.

Munro said: “Trail commission will gradually disappear over the next few years, having already become an administrative burden for providers post-RDR. Most reputable financial planners have already replaced this outdated method of payment by agreeing a fair and transparent fee structure with their clients, who pay an annual amount direct for the agreed level of service they receive.”

You may well be paying trail commission that you agreed with the adviser and be happy with it. But what are your options if you’re paying it and would rather not? Bear in mind that trail commission is paid to cover ongoing service, so find out if your adviser is still serving you and, if so, whether they’ll be reviewing your investments or providing advice in the future.

If the response is negative, ditch them and sell the products involved or try to have the trail commission re-registered to any new adviser you use.

The easiest way to stop it is to sell the investments on which the trail commission is being paid, provided there are no penalties for doing so. Even if you then buy the same product again, you’ll be doing so under the new rules, with no trail commission.

“Contact the investment group direct and have it turned off, and subsequently receive the amount charged back as investment returns,” Munro said.

There’s also the possibility of reclaiming your trail commission, with firms including Massow’s (www.paymemy.com/mission) and InvestSmart (www.investsmartuk.co.uk) specialising in this service.

The former charges a one-off fee of £125 for securing a rebate of all future commission you’re due to pay. The latter rebates 85 per cent of all future commission, keeping the remainder as its fee.

Trail commission has its place, said Munro, but only if it serves a purpose. “An ongoing fee such as trail commission essentially covers the cost of annual reviews, recommending necessary changes to underlying investments and generally ensuring the predefined financial plan agreed at outset continues to meet investors’ needs and objectives throughout their lifetime,” he said.

“If none of these services is being provided, then ask the adviser what their service proposition is? If there is no service level suitable, choose another adviser who does offer ongoing service with at least one or two review meetings a year.”

Twitter: @VaughanSalway

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