Question
More on RDR
Following your previous helpful comments I was interested to read the Treasury Select Committee report on RDR, just released, with increasing cynicism.
There was an interesting comment that some providers are increasing the level of trail commission paid to intermediaries in advance of the RDR deadline, currently given as January 2013. Is there any evidence that the recent "inexplicable" rises in annual charges by Henderson (for Gartmore companies) and certain Standard Life Funds translate into greater trail commission to advisors, no doubt to assist them in dreaming up their best recommendations in the shortening period left?
There's also the interesting statement in their final Conclusions, para 5, that "There is already full disclosure to customers of the cost of the advice they receive, whether paid for via commission or fees. However, as both advisers and the FSA have told us, many consumers appear to see financial advice as being 'free' under a commission based system, despite adviser disclosure of its actual cost." Does "full disclosure" mean a standard statement hidden in the small print of "terms and conditions" because I have never seen a statement of actual annual cost in pounds and pence in any correspondance from HL, Bestinvest, Chartwell or Fundsnetwork regarding myself or my wife over many years?Answer
I can't recall any examples of trail commission payments increasing recently, with the vast majority of funds continuing to pay the 'standard' 0.5% a year. Nevertheless, I'm sure there are some funds that pay more (as well as less), such is life in an open market.
I don't think the recent annual charge hikes by Standard Life and Henderson/Gartmore will result in higher trail commissions being paid, the increases seem to be more motivated by the fund managers simply wanting to increase their revenue. But I share your concern that there's a risk we'll see some funds raise charges to pay higher sales commissions to advisers (because it'll probably result in more sales).
I'm generally a fan of RDR, but am exasperated at how much money and manpower the FSA has probably thrown at trying to solve a ridiculously easy problem - bias and mis-selling caused by sales commissions. The answer takes all of about 10 seconds to work out - ban commissions and force product providers to price their products accordingly. Even better, remove platform fees from products as well so the public can effectively buy funds at institutional rates, i.e. the same price as large pension funds.
This approach ensures total transparency. We, the customers, can buy products at rock bottom prices if we don't want advice or to use a platform. If we want these facilities then they'll be explicitly priced so we can shop around for a good deal - ensuring competitiveness in the marketplace.
At the moment RDR appears to be stopping commissions (although advisers will be able to get customers to sign a piece of paper that lets them take their charges from products - effectively the same thing) but will allow platform fees to continue being bundled into fund charges - a mistake in my opinion.
Yes, the current rules do require financial advisers and discount brokers to disclose how much commission they expect to receive when you transact through them. However, your suspicions are correct, they can be hidden away in smallprint - within a 'key features' document. It would be far better if advisers and brokers were compelled to include this information in the annual statements/valuations they send you (and, even better, online). However, you could request they confirm the amount of trail commission they receive (as a percentage) for each investment held, along with the extent any is rebated to you.
In the case of advisers/brokers who also run their own platform (e.g. Hargreaves Lansdown) it's a bit more complicated as they also receive a platform fee from fund providers which doesn't have to be disclosed. So, for example, they might receive 0.5% trail commission and a further 0.25% or more via a platform fee - but we've no way of knowing how much the latter actually is. My concern is that some fund providers might pay higher than usual platform fees to induce an adviser/broker to promote a fund more heavily via their platform - back to the usual problem of remuneration potentially causing bias...
More on RDR
Following your previous helpful comments I was interested to read the Treasury Select Committee report on RDR, just released, with increasing cynicism.
There was an interesting comment that some providers are increasing the level of trail commission paid to intermediaries in advance of the RDR deadline, currently given as January 2013. Is there any evidence that the recent "inexplicable" rises in annual charges by Henderson (for Gartmore companies) and certain Standard Life Funds translate into greater trail commission to advisors, no doubt to assist them in dreaming up their best recommendations in the shortening period left?
There's also the interesting statement in their final Conclusions, para 5, that "There is already full disclosure to customers of the cost of the advice they receive, whether paid for via commission or fees. However, as both advisers and the FSA have told us, many consumers appear to see financial advice as being 'free' under a commission based system, despite adviser disclosure of its actual cost." Does "full disclosure" mean a standard statement hidden in the small print of "terms and conditions" because I have never seen a statement of actual annual cost in pounds and pence in any correspondance from HL, Bestinvest, Chartwell or Fundsnetwork regarding myself or my wife over many years?Answer
I can't recall any examples of trail commission payments increasing recently, with the vast majority of funds continuing to pay the 'standard' 0.5% a year. Nevertheless, I'm sure there are some funds that pay more (as well as less), such is life in an open market.
I don't think the recent annual charge hikes by Standard Life and Henderson/Gartmore will result in higher trail commissions being paid, the increases seem to be more motivated by the fund managers simply wanting to increase their revenue. But I share your concern that there's a risk we'll see some funds raise charges to pay higher sales commissions to advisers (because it'll probably result in more sales).
I'm generally a fan of RDR, but am exasperated at how much money and manpower the FSA has probably thrown at trying to solve a ridiculously easy problem - bias and mis-selling caused by sales commissions. The answer takes all of about 10 seconds to work out - ban commissions and force product providers to price their products accordingly. Even better, remove platform fees from products as well so the public can effectively buy funds at institutional rates, i.e. the same price as large pension funds.
This approach ensures total transparency. We, the customers, can buy products at rock bottom prices if we don't want advice or to use a platform. If we want these facilities then they'll be explicitly priced so we can shop around for a good deal - ensuring competitiveness in the marketplace.
At the moment RDR appears to be stopping commissions (although advisers will be able to get customers to sign a piece of paper that lets them take their charges from products - effectively the same thing) but will allow platform fees to continue being bundled into fund charges - a mistake in my opinion.
Yes, the current rules do require financial advisers and discount brokers to disclose how much commission they expect to receive when you transact through them. However, your suspicions are correct, they can be hidden away in smallprint - within a 'key features' document. It would be far better if advisers and brokers were compelled to include this information in the annual statements/valuations they send you (and, even better, online). However, you could request they confirm the amount of trail commission they receive (as a percentage) for each investment held, along with the extent any is rebated to you.
In the case of advisers/brokers who also run their own platform (e.g. Hargreaves Lansdown) it's a bit more complicated as they also receive a platform fee from fund providers which doesn't have to be disclosed. So, for example, they might receive 0.5% trail commission and a further 0.25% or more via a platform fee - but we've no way of knowing how much the latter actually is. My concern is that some fund providers might pay higher than usual platform fees to induce an adviser/broker to promote a fund more heavily via their platform - back to the usual problem of remuneration potentially causing bias...
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