Question
Since 31st December 2012 are discount brokers still able to return "trail commission" to investors on existing and new investments? I'm confused by RDR and thought it had been banned - or is it now sourced in a different way from platform fees?Answer
Yes, they can, as the commission ban currently only applies when financial advice is given.
A commission ban on non-advised sales (i.e. when you make your own decisions and use a discount broker) is on the cards and a recent announcement by HMRC will make this less appealing for investments held outside of ISAs and pensions in any case, as any rebates will be taxable from 6 April 2013 – see my article here.
Fees paid by fund managers to platforms are due to be banned by the end of year, meaning platforms will have to charge investors directly, like an increasing number already do.
The upshot of all this is that at present there are two basic ‘models’ used by platforms:
1. Use standard ‘retail’ versions of funds that typically have annual fund management charges of c1.5% from which c0.5% is paid as trail commission and c0.25% as a platform fee.
Or
2. Use ‘clean’ versions of funds that typically have a c0.75% annual management charge (i.e. the commission/platform fees are not built in) and charge customers directly for any platform or discount broker fees.
The latter is more transparent and will undoubtedly become the norm over the next year, if not sooner – due to a combination of HMRC’s tax on rebates, the ban on fund managers paying platform fees and a possible commission ban on non-advised sales. All in all a good thing - customers can clearly see exactly how much each party is charging.
However, I predict that Hargreaves Lansdown (the largest direct to public platform) will be amongst the last to make the move to ‘clean’ funds – they arguably have the most to lose from giving customers complete transparency on how much they’re effectively charging them via commissions – as they refuse to disclose commissions received for individual funds.
Since 31st December 2012 are discount brokers still able to return "trail commission" to investors on existing and new investments? I'm confused by RDR and thought it had been banned - or is it now sourced in a different way from platform fees?Answer
Yes, they can, as the commission ban currently only applies when financial advice is given.
A commission ban on non-advised sales (i.e. when you make your own decisions and use a discount broker) is on the cards and a recent announcement by HMRC will make this less appealing for investments held outside of ISAs and pensions in any case, as any rebates will be taxable from 6 April 2013 – see my article here.
Fees paid by fund managers to platforms are due to be banned by the end of year, meaning platforms will have to charge investors directly, like an increasing number already do.
The upshot of all this is that at present there are two basic ‘models’ used by platforms:
1. Use standard ‘retail’ versions of funds that typically have annual fund management charges of c1.5% from which c0.5% is paid as trail commission and c0.25% as a platform fee.
Or
2. Use ‘clean’ versions of funds that typically have a c0.75% annual management charge (i.e. the commission/platform fees are not built in) and charge customers directly for any platform or discount broker fees.
The latter is more transparent and will undoubtedly become the norm over the next year, if not sooner – due to a combination of HMRC’s tax on rebates, the ban on fund managers paying platform fees and a possible commission ban on non-advised sales. All in all a good thing - customers can clearly see exactly how much each party is charging.
However, I predict that Hargreaves Lansdown (the largest direct to public platform) will be amongst the last to make the move to ‘clean’ funds – they arguably have the most to lose from giving customers complete transparency on how much they’re effectively charging them via commissions – as they refuse to disclose commissions received for individual funds.
Read this Q and A at http://www.candidmoney.com/askjustin/838/can-discount-brokers-still-receive-commission
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