Question
As I understand it commissions are to end later this year.
I have been looking at your SIPP comparison table and the best value SIPP providers are the ones that rebate the most commission, outweighing sometimes higher annual fees.
Will all this change once commissions are banned and the Sipp providers with no annual fee become the better value?Answer
There'll be change, but unfortunately it's not that simple.
Commissions will be banned for advised sales from 31 December 2012. That means if you buy funds via a financial adviser the fund manager will not be allowed to pay the adviser any sales commission. In theory this should knock about 3% and 0.5% off a fund's initial and annual charges respectively. But in practice the adviser can charge a percentage fee to be taken from the fund, if agreed by their client. So if the adviser takes 3% initial and 0.5% annual 'fees' then the fund cost would effectively remain unchanged.
Commissions will continue to be allowed on non-advised sales, i.e. 'execution-only' deals. So in theory no change to discount brokers. However, the FSA is contemplating a commission ban here too, which I think likely within a year or two.
The other part of the equation is the fees currently paid by fund managers to fund platforms/supermarkets, generally thought to be around 0.25% a year. The FSA wants to ban these payments in favour of platforms charging investors an explicit fee. The change is tentatively planned for 31 December 2013, but not confirmed as yet.
So what we might end up with is funds removing sales commission and platform fees from their charges, giving no initial charges and annual charges of around 0.75%. This is the same as the 'institutional' units already offered by many funds (to larger investors) so this will probably just be extended to retail investors too.
As for SIPPs, Interactive Investor and Alliance Trust Savings have already adopted this kind of charging. As they both operate their own platforms they can rebate both platform fees and trail commissions in return for explicit annual and dealing fees. They're starting to use institutional units for some funds, which avoids the hassle of rebates, and I expect this to extend across the full range of funds they offer over the next year or two.
SIPP providers like Hargreaves Lansdown who keep trail commission and platform fees will be in a quandary if the above changes go through. At the moment they enjoy an annual margin of 0.79% via their Vantage platform (according to their accounting statements) - probably higher for the SIPP as no trail commission rebates. But as their clients mostly pay this via fund charges than direct fees it largely goes unquestioned. If those clients have to pay c0.79% as an explicit fee on top institutional fund pricing they might think twice.
So, to answer your question, I doubt the net cost of the various SIPP providers will change that much. Some have already adopted this new style pricing while others might have to change how they charge but won't become any cheaper unless they cut their margins.
For a more in depth explanation please take a look at my fund charges article.
As I understand it commissions are to end later this year.
I have been looking at your SIPP comparison table and the best value SIPP providers are the ones that rebate the most commission, outweighing sometimes higher annual fees.
Will all this change once commissions are banned and the Sipp providers with no annual fee become the better value?Answer
There'll be change, but unfortunately it's not that simple.
Commissions will be banned for advised sales from 31 December 2012. That means if you buy funds via a financial adviser the fund manager will not be allowed to pay the adviser any sales commission. In theory this should knock about 3% and 0.5% off a fund's initial and annual charges respectively. But in practice the adviser can charge a percentage fee to be taken from the fund, if agreed by their client. So if the adviser takes 3% initial and 0.5% annual 'fees' then the fund cost would effectively remain unchanged.
Commissions will continue to be allowed on non-advised sales, i.e. 'execution-only' deals. So in theory no change to discount brokers. However, the FSA is contemplating a commission ban here too, which I think likely within a year or two.
The other part of the equation is the fees currently paid by fund managers to fund platforms/supermarkets, generally thought to be around 0.25% a year. The FSA wants to ban these payments in favour of platforms charging investors an explicit fee. The change is tentatively planned for 31 December 2013, but not confirmed as yet.
So what we might end up with is funds removing sales commission and platform fees from their charges, giving no initial charges and annual charges of around 0.75%. This is the same as the 'institutional' units already offered by many funds (to larger investors) so this will probably just be extended to retail investors too.
As for SIPPs, Interactive Investor and Alliance Trust Savings have already adopted this kind of charging. As they both operate their own platforms they can rebate both platform fees and trail commissions in return for explicit annual and dealing fees. They're starting to use institutional units for some funds, which avoids the hassle of rebates, and I expect this to extend across the full range of funds they offer over the next year or two.
SIPP providers like Hargreaves Lansdown who keep trail commission and platform fees will be in a quandary if the above changes go through. At the moment they enjoy an annual margin of 0.79% via their Vantage platform (according to their accounting statements) - probably higher for the SIPP as no trail commission rebates. But as their clients mostly pay this via fund charges than direct fees it largely goes unquestioned. If those clients have to pay c0.79% as an explicit fee on top institutional fund pricing they might think twice.
So, to answer your question, I doubt the net cost of the various SIPP providers will change that much. Some have already adopted this new style pricing while others might have to change how they charge but won't become any cheaper unless they cut their margins.
For a more in depth explanation please take a look at my fund charges article.
Read this Q and A at http://www.candidmoney.com/questions/question734.aspx
No comments:
Post a Comment