Thought com­mis­sion was out­lawed? Ad­vis­ers still pocket nearly £1bn a year

The Daily Telegraph - Your Money - - YOUR MONEY - Sam Brod­beck

Fi­nan­cial ad­vis­ers were banned from tak­ing com­mis­sion on the port­fo­lios of pri­vate in­vestors in 2013, but a loop­hole means they are still pock­et­ing £845m of in­vestor money a year. Fol­low­ing years of pres­sure, com­mis­sion was out­lawed by the City watch­dog be­cause ad­vis­ers – who at that point ar­ranged the ma­jor­ity of pen­sion and in­vest­ment plans – were mak­ing rec­om­men­da­tions based on which firms paid them the most.

But so-called “trail” com­mis­sion, built into a con­tract be­fore the 2013 ban, was al­lowed to con­tinue. The ad­viser who orig­i­nally set up the con­tract typ­i­cally re­ceives around 0.5pc a year in com­mis­sion, which is built into the man­age­ment charge in­vestors pay.

This means that ad­vis­ers trousered £845m from in­vestors last year, City watch­dog fig­ures show – and many in­vestors will no longer have a re­la­tion­ship with these ad­vis­ers, nor re­ceive ad­vice from them.

As Tele­graph Money has high­lighted be­fore, even small in­creases in charges can have a dra­matic im­pact on the long-term growth of an in­vest­ment. Sav­ing £200 a month, as­sum­ing 5pc an­nual growth and 0.65pc of fees a year, would pro­duce a portfolio worth £145,000 over 30 years. If fees were dou­bled to 1.3pc a year, that would shave £16,000 off the sum.

For­ward-think­ing ad­vice firms have “turned off ” trail pay­ments, par­tic­u­larly where they no longer have a re­la­tion­ship with the saver. But oth­ers still rely on the trickle of pay­ments from plans that were set up decades ago.

Your pen­sion or in­vest­ment provider must state if they are still pay­ing out trail com­mis­sion as part of your an­nual state­ments. If you dis­cover you are pay­ing, you can con­tact the firm to re­move the com­mis­sion, and so cut your fees. How­ever, some of the big­gest providers in Bri­tain do not re­duce man­age­ment fees once com­mis­sion is stripped out – they sim­ply pocket the dif­fer­ence. Re­search from Can­did Fi­nan­cial Ad­vice dis­cov­ered providers in­clud­ing Ae­gon, Friends Life (now part of Aviva), and Scot­tish Wid­ows did not re­duce the fees in­vestors pay on­ceo com­mis­sion is re­moved. ForF in­stance, a pen­sion plan may have charges of 1.5pc a year of which 0.5p is paid as “trail com­mis­sion” to the ad­viser. The pen­sion provider turns off the 0.5pc pay­ment but the charge re­mains at 1.5pc, so the sav­ing is not passed on. Can­did Fi­nan­cial Ad­vice’s Justin Mo­dray said in­vestors who want to turn off the trail should ask their provider to move them to a modern con­tract that al­lows them to ben­e­fit from switch­ing off com­mis­sion. Al­ter­na­tively you could move your money to one of the new breed of low-cost “fund shops”.

How­ever, Mr Mo­dray warned in­vestors to check they were not giv­ing up valu­able ben­e­fits of­fered by the old plan: “You need to en­sure there are no penal­ties to leave the ex­ist­ing pen­sion and also that there aren’t any ben­e­fits or guar­an­tees you’ll lose by trans­fer­ring.”

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