SINS OF COMMISSION
Is your financial adviser being paid for doing nothing? It is quite
possible. And the changes which began on 31 December – called the Retail
Distribution Review or RDR – may not have helped.
Before the RDR advisers could be paid two sorts of commission. One was an
upfront percentage of the amount you invested. The money was paid by the firm
you invested your money with and could be as low as 1% or as high as 9% - more
in some rare cases. But there was another sort of commission called ‘trail’. It
was a smaller percentage of your investment – typically around 0.5% but it could
be more – and it went on for as long as you kept the investment.
Trail was supposed to encourage your adviser to keep in contact and
review your investments. But there was generally nothing in the contract that
made them and many did not. Some bad advisers were motivated to keep in touch by
the prospect of more upfront commission if they moved your investments from one
provider to another. When that was done unnecessarily just to earn commission it
was called ‘churning’. And one reason that the RDR has banned commission for new
pension and investment advice was to get rid of that commission bias.
But now a new problem has emerged. Any trail commission earned before 31
December 2012 will carry on as long as the investment is kept. So now poor
advisers are motivated the other way. If they move your money to a different
investment the trail will stop. But if they keep your investments where they are
the trail commission carries on. Although
0.5% on £50,000 is only £250 a year, an adviser with a lot of clients can see
trail as a nice steady income stream.
So what can you do about it? The first thing is to ask your adviser what
trail commission they are being paid on your investments – ask for the amount in
pounds not percents. By law they have to tell you. It may be nothing as some
older investments paid all the commission upfront. If there is trail being paid
you can ask your adviser to do some work for it. Get them to rebate the money to
you – adding it to your investment each year or writing you a cheque. And in
exchange you will pay them a fee – not a percentage – for ongoing work as and
when it happens. If they refuse then move your money and the trail commission to
an independent financaila adviser who will. Unfortunately you cannot just leave
your adviser and get the investment firm to pay the trail direct to you.
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