The cost of investing could edge up over the coming months as the deadline nears for so-called trail commission payments to be switched off.
Commission payments from providers to advisers on investment products came to an end when the retail distribution review (RDR) took effect nearly three years ago.
But that only covered new sales. Many people are still paying trail commission to advisers, pension firms or fund platforms on investments sold prior to December 2012, usually in the form of an annual payment of 0.5 per cent.
The charge comes out of their fund to pay their adviser (or fund platform) for ongoing administration. That will effectively end on 6 April 2016, which is the date by which all payments between fund managers and platforms must end.
The deadline is the “sunset clause” in rules implemented in April 2014 requiring fund platforms to disclose to investors the exact cost of their services, advice and ongoing fund management.
“For years the charges investors paid for fund management also covered commission for their adviser and an allowance for the platform on which you held the investment,” said Mark Polson, principal at Edinburgh-based consultancy The lang cat .
“The sunset clause simply means that the parts of your fund management charge which were paid away to your adviser and your platform are removed.”
So instead of paying one all-inclusive charge, investors will now pay three charges (or two if they don’t have an adviser).
“You’ll pay an explicit fund management charge, which will typically be 0.75 per cent plus expenses for an actively managed fund (you used to pay 1.5 per cent plus expenses),” Polson explained. “Your platform will charge you typically between 0.25 per cent and 0.45 per cent a year. What you pay your adviser is down to what you agree; but between 0.5 per cent and 1 per cent a year is common.”
But while this might make things clearer, it may also push up the cost of investing, Polson warned. “The eagle-eyed will have spotted that 0.75 per cent plus, say, 0.35 per cent, plus 0.5 per cent equals more than the 1.5 per cent that you used to pay. The sunset clause makes things more transparent. It doesn’t necessarily make them cheaper,” he said.
That’s because fund managers have taken the opportunity to increase their margins
“Instead of charging 0.75 per cent, which was the net rebated rate, they have increased their rate to 0.8 per cent or more,” said Derek Stewart, managing director of Sam Wealth in Glasgow.
Several of the UK’s biggest fund platforms have still to transfer billions of pounds of investors’ assets into the new commission-free share classes.
Most financial advisers overhauled their charging structures with the RDR, which also raised qualification and ongoing training requirements for advisers. But trail commission still accounted for nearly 40 per cent of adviser income in 2014, according to the Association of Professional Financial Advisers.
“Good adviser firms have been formalising the level of service over the last few years and switching the trail commission to an adviser charge,” said Stewart. “At the same time they have been increasing the charge to 0.75 to 1 per cent a year, which again increases the overall cost to the customer.”
Advisers still receiving trail commission have several choices come 6 April 2016. One option is to do nothing, as the annual commission stops automatically when funds are altered to a ‘clean’ (commission-free) share class.
But some will simply stop servicing certain clients, warned Iain Wishart, owner of Wishart Wealth Management.
“That option may see many consumers ‘orphaned’ through no fault of their own. This is a side effect of the retail distribution review, the sunset clause and also advice firms choosing to service a particular niche where they can operate at a profit.”
Stewart agreed. “Smaller clients may find adviser firms are not willing to provide a service if it is no longer economical for them to do so.”
Some people will benefit, however, especially if they’re among the minority still paying for ongoing service that they might not even be getting.
“Customers have the right to stop trail commission being paid to their adviser and if they aren’t receiving any service then they should take advantage of this change in legislation,” said Stewart.”