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