How much trail commission is being paid?

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...

Read this Q and A at http://www.candidmoney.com/questions/question528.aspx

All about nominee accounts

Nominee accounts are commonplace nowadays, but do you understand the implications of using them?.

Ok, apologies for writing about a dull subject. But despite most of us holding at least some of our investments via nominee accounts these days, they're generally not well understood - especially when it comes to security and compensation scheme cover.

So please take a quick read, I'll keep things succinct.

Before nominee accounts...

Traditionally when you bought shares or funds, you'd be the registered owner and receive a certificate confirming this. This makes it very easy to sell shares via any stockbroker and your name will appear on the share register, ensuring you can vote and receive any shareholder perks.

However, the certificate system makes dealing cumbersome (as you have to send your certificate to the stockbroker before being able to sell) and expensive (more admin for the stockbroker). And it also delays switching funds between different managers - you have to sell units in one fund, wait for the proceeds then re-invest with the new manager.

What are nominee accounts?

Nominee accounts are separate companies owned by stockbrokers or fund platforms that hold shares or funds on behalf of all their customers. For example, suppose 100 customers of stockbroker A each buy 1,000 BP shares, then the nominee company (i.e. account) will hold 100,000 BP shares and be the registered owner. The nominee account's terms and conditions will state that the customers are the 'beneficial' owners of 1,000 BP shares each.

The same is true of fund platform nominee accounts - plus the platform will bundle together all customer buy and sell instructions for every fund each day, then place a single net buy or sell order per fund with the underlying fund managers.

Put simply, a nominee company owns the shares or funds but promises to pay customers what they're owed (i.e. dividends and proceeds when shares/funds sold, or the shares/units themselves if you move the nominee account to another broker).

Why are they popular?

Nominee accounts have become commonplace largely because they facilitate online and telephone dealing. The benefit to customers is faster, simpler dealing (cheaper too in the case of shares). Plus fund platform nominee accounts allow investors to hold funds from multiple fund managers - helpful when it comes to switching or holding them within an ISA.

Stock brokers like them because it significantly cuts down on their hassle and expense, while fund platforms collect a fee from either fund managers or customers for offering the service.

Are they safe?

Yes, but they're not immune to fraud.

Nominee companies are separate entities from the stockbroker or fund platform that set them up. If the broker goes bust the shares/funds/cash held in the nominee company are ring fenced, hence unaffected. It might take a while to get the assets re-assigned to you, but they'll be safe.

However, if the stockbroker or fund platform was illegally dipping their fingers into the nominee company then you could lose money.

Are nominee accounts covered by compensation schemes?

As explained above, if the stockbroker or fund platform goes bust your shares/funds/cash should be safe. But if fraud has taken place the Financial Services Compensation Scheme (FSCS) would normally step in (provided the stockbroker/platform is covered by the scheme - they should be if based in the UK and regulated by the FSA).

FSCS compensation gives up to £50,000 protection per institution per person, i.e. £50,000 of cover per stockbroker or fund platform. So hold more than this and you could potentially lose money in the unlikely event of fraud and the broker/platform not being able to repay what you're owed.

If you hold bank accounts or funds within a nominee account then these will normally be covered individually too,, i.e. cash will be covered up to £85,000 and funds £50,000 - both per institution (i.e. bank/fund group) per person. But this is protection against the underlying bank/fund manager not being able to repay you - a totally separate issue from the nominee account.

The pros & cons of nominee accounts

Pros	Cons
Cuts administration Low cost Aides faster dealing	Accounts over £50,000 not fully protected No access to voting and shareholder perks (although some brokers do offer a workaround)

The alternatives

Shares

It's still possible to deal using share certificates, but increasingly rare. If you want the benefits of online dealing while being the registered owner of the shares you'll need to use a Crest Personal Account. Stockbrokers must apply for this on your behalf and it costs them £10 a year, but don't be surprised if they try and charge you a lot more than this. The downside is that these can't be used for ISAs and few stockbrokers currently offer the facility.

Funds

The only current alternative is to buy funds directly from fund managers - straightforward, but quite cumbersome if you hold a number of different funds.

Summary

On balance I think nominee accounts are a good thing. Just make sure you trust your chosen stockbroker or fund platform. And, if you are worried, cap your holdings to £50,000 per broker/platform.

Read this article at http://www.candidmoney.com/articles/article238.aspx

Reclaim foreign withholding tax in SIPP?

Question
Could you please clarify how withholding tax works for foreign shares held within a SIPP?

My issue is that my SIPP provider does not provide any support in claiming back part of the withholding tax on US or European shares (I know that I should be able to claim back anything above 15% due to bi-lateral agreements between UK and US/European countries).

If I wanted to do that by myself, will I have to contact the tax offices in each country?

If so, how will I get around the fact that the shares are held in a nominee account, therefore are not in my own name? (which is standard practice for SIPP/ISA accounts).Answer
For the benefit of other readers, foreign withholding taxes are often deducted from dividends paid by foreign companies to investors who are tax resident in a different country. For example, 30% withholding tax is normally deducted on dividends paid by US companies to UK investors.

As you point out, the UK has double taxation agreements in place with many countries that usually allow you offset some of the foreign withholding tax against your UK liability. Although the offset amount varies between countries, it's most commonly 15%.

In the case of the US it's possible to complete form W-8BEN to reduce the rate of US withholding tax from 30% to 15%, but if the country concerned doesn't have a similar agreement a tax refund must be sought from the tax authority in the country concerned - which can be harder than getting blood from a stone (from what I've heard some take a long time to pay while others don't bother).

Holding foreign shares in a SIPP or ISA makes no difference, the withholding tax is still deducted. So it's a real pain that your SIPP provider doesn't handle the above for you.

If you want to try and reclaim withholding tax you'll have to contact each country's tax office separately, although the HMRC Residency centre in Nottingham (0151 210 2222) can sometimes supply the necessary forms. If you do apply you may face a long wait...

Holding shares via a nominee account should not preclude a tax reclaim provided you can supply a nominee statement to confirm you own the shares along with a tax voucher for the dividend received (your SIPP provider should provide this, if nothing else).

If the amounts are significant you might consider transferring to another SIPP provider who does reclaim withholding tax, although you'll need to weigh up whether it's cost effective to do so and I think most only reclaim withholding tax from a handful of countries (US being most common via a W-8BEN form).

The alternative is to buy foreign shares that pay little/no dividends (although this reduces investment choice) or use investment funds where the manager sorts the tax reclaim process (they should as a matter of course).

Read this Q and A at http://www.candidmoney.com/questions/question525.aspx

How would weaker EU countries going bust affect markets?

Question
I cant believe Germany are going to carry on bailing out the weaker EU Countiries and that the European Union will break up - if this does happen what do you think will happen to the stock market and financial markets ?Answer
In the short term stock markets would probably fall quite heavily if the EU were to break up, due to all the uncertainty it would cause - stock markets don't like uncertainty. Gold would probably rise, as it's popular in times of uncertainty, while demand for bonds issued by rock solid governments would probably rise (as investors flock to safety).

However, after the initial fallout, stock market fortunes moving forwards would probably be quite mixed.

Companies with a high exposure to the weaker countries might generally suffer, as those consumers and governments would likely have less to spend due to the severe austerity measures that would be required to try and shore up their economies. Banks with high lending exposure in those countries would probably suffer too due to rising bad debts.

However, companies with little/no exposure to the weaker countries are unlikely to be affected that much, if at all. How the potential break up of the European Union would affect cross-European and global trade is less clear - EU trade agreements would theoretically be torn up, although they'd need to be replaced by something. Germany is a big exporter and would probably put its own agreements in place pretty quickly.

The euro would also die, with eurozone countries reverting back to their own currencies. This would help stricken countries as their currencies would weaken to the point that foreign investors are prepared to lend to the governments at affordable rates (i.e. they can buy government bonds at worthwhile prices thanks to favourable exchange rates) and make exports cheaper.

I can't see the eurozone and European Union disintegrating but, like you, I doubt Germany and France will continue bankrolling the weaker economies (the main contenders being Greece, Ireland, Portugal and Spain) forever. I think it's more likely that countries struggling to borrow will be kicked out of the euro, which should effectively allow them to borrow again via the markets (by making their debt cheap via devalued currency - see above). Whether or not they remain in the European Union I'm not sure, but I think that decision will have less impact on markets by the time its eventually made (assuming it needs to be).

In summary, I think we can probably expect a rather bumpy ride over the next year or two. As well as all the potential problems in Europe, spending cuts and tax rises are still taking hold back home and energy/food price inflation remains a problem pretty much the world over. On the bright side, the credit crunch has forced many companies to become leaner and more efficient, so although the climate is tough there are still plenty of profits being made.

Read this Q and A at http://www.candidmoney.com/questions/question524.aspx

Use a DRO when in negative equity?

Question
Regarding DRO's, my mother-in-law has a mortgage and may be in negative equity. She has unsecured debts totalling £23,000 and is currently paying a token payment back each month to each of them. If her debts were to fall below £15,000 is this debt then wiped off after 12 months?

I knew nothing of the existence of DRO's until I read your article!Answer
One of the conditions to qualify for a DRO is having assets of £300 or less. While the £300 generally excludes household furniture, it would include your mother-in-law's home - even if she has negative equity.

The DRO qualification test looks at 'gross' assets, i.e. the value of items you own ignoring any debts secured on them. So even though her mortgage might be greater than the value of her home, it's the actual house value rather than value net of the mortgage that will be used - obviously more than £300.

if she can afford to repay at least £200 per month then an individual voluntary agreement might be an option. The debt is usually reduced by 40-60% and repaid over 5 years, but this must be carried out via a private company who'll charge fees of around £7,500 in total - hardly a cheap option. Plus missing payments could lead to bankruptcy.

Bankruptcy is the last resort, as this would very likely mean your mother-in-law losing her home. It can also be quite expensive and she'd probably struggle to borrow any money for 6 years afterwards.

So I'm afraid there is no simple solution that I'm aware of. I'd encourage her to speak to her local Citizens Advice Bureau, if she hasn't already. The key thing short term is to stop lenders adding more interest to the money owed, else she'll probably never escape the debts. At best she might be able to negotiate a freeze in interest and reduction in the debts if she can commit to regular repayments. After all, lenders would usually rather get something back than nothing at all.

I hope she manages to sort things out.

Read this Q and A at http://www.candidmoney.com/questions/question523.aspx

Choosing a discretionary investment manager?

Question
I am looking at using a dicretionary management service. namely Best Invest. They recently won the FT / Investor Chronicle Best Wealth Manager Award.
However, I want to know what the overall charge is for me to use their service. As I understand it from some of your most informative articles, the total cost is likely to be:

Best Invest Management Fees 1.0% plus VAT = 1.20%

External fund Manager Fees, say 1.5%

less. rebate, they state (0.5%)

Total Potential charge is 2.2% per annum

plus there are likely to be transaction charges to - but I dont know the average percentage

Are these figures and my understanding correct?Answer
Without wishing to belittle Bestinvest's discretionary service (which from my experience when working there a few years ago was pretty good), I've never paid much attention to awards. Publications run awards events primarily to make money - via sponsorship, charging companies to attend a ceremony and then charging winners to use the logo on websites and literature. Sadly the due diligence process for selecting winners tends to be rather variable - some are good while others almost non-existent - and it's nigh on impossible for us (the public) to know how rigorous any particular award judging has been.

Anyway, back to charges, your understanding looks correct. Technically the external fund charges are more likely to be around 1.6% - 1.7% (using the total expense ratio fund charge figure which includes a few extra costs), but then some funds and investment trusts held might have lower annual charges, so I think your 2.2% figure is probably quite realistic.

I don't think there are dealing charges for funds, but I'd expect dealing fees if the investment managers buy investment trusts (as they're stock market traded investments). Bestinvest doesn't disclose these on its website, which is a bit frustrating. Given you can trade online for less than £10 per deal these days I'd be concerned if the amount was much more than this.

When using a discretionary management service the sums involved tend to be large, so I'd always suggest 'interviewing' at three different companies before making a decision.

As well as clarifying charges, ask to see some sample portfolios along with past performance. And check exactly what sort of service is included in the cost. Will the manager simply run your portfolio, or will they also provide some tax planning and financial advice too where necessary?

I'd also check how bespoke the service will be. Some 'discretionary' managers simply stick your money into an in-house fund of funds, which is hardly bespoke or very flexible (although very profitable for the manager). It's natural that discretionary investment managers will hold their favoured investments across many of their client's portfolios, but it's important they can cater for any specific needs or preferences you might have.

Finally, although discretionary investment management is. by nature, quite hands-off from your point of view, it can be very helpful to be able to view your portfolio online along with comparative performance to relevant benchmarks. This means you can check how your money's invested whenever you want and ascertain how good (or bad) a job the investment manager is doing.

Read this Q and A at http://www.candidmoney.com/questions/question522.aspx

Artemis or Blackrock UK Special Situations?

Question
I've a small holding in JPM UK Dynamic. It's done OK over the years but seems to have gone through a number of managers and I now feel I could improve on it's performance.

Either Artemis or Blackrock UK Special Situations appear to be superior alternatives for a switch. Both seem well regarded by HL, BestInvest, Fidelity, Chelsea etc etc and have similar ratings by Morning Star and OBSR. TrustNet gives the Blackrock manager "alpha" status whilst the Lipper rating slightly favours Atremis. Atremis also has a better TER at 1.56% (Blackrock 1.67%).

Could you suggest any further research I could do to assist in my selection? as both funds seem so evenly matched at present.Answer
The JPM UK Dynamic fund supposedly contains JP Morgan's UK stock market 'best ideas' - performance over the last 5 years suggests their ideas have unfortunately not been very good. As always, that's not to say it won't do well in future, but I think your intention to switch elsewhere is sensible.

As for researching alternatives, you've made a good start by polling the various discount broker 'buy lists' and data from research agencies.

I'd suggest taking a look at the management style of the funds concerned, along with holdings, to better understand the potential risks involved and how they might cope with the challenging economic times that likely lay ahead.

Artemis UK Special Situations, managed by Derek Stuart, has performed well, albeit a bit erratically in recent years. Blackrock UK Special Situations, run by Richard Plackett, has outperformed (the FTSE All Share Index) more consistently, although volatility along the way has been a little higher versus Artemis.

Both funds invest in a mix of company sizes, with around 40% typically invested in larger companies and the balance split between medium and small.

Where they really differ is investment style. Stuart favours companies that offer value for money, for example those tipped for recovery after a difficult period, whereas Plackett prefers 'growth' investing - i.e. companies that have been doing well and look set to continue strong growth.

Despite this, they both share a bias towards the industrials and energy sectors. However, Plackett has a much higher weighting towards financials and hard commodities while Stuart has a greater preference for healthcare and food companies.

In theory value investing should fare better during a downturn while growth does better during the good times, but things are never that simple - as confirmed by a quick look at past performance for both funds.

Nevertheless, I'd probably favour the Artemis fund if you think global economies will struggle over the next few years, otherwise Blackrock looks more enticing.

But as these things are difficult to predict, I'd be inclined to split your money between the two!

Read this Q and A at http://www.candidmoney.com/questions/question521.aspx