INVESTORS with money in stock market funds and investment bonds are paying close to £800 million a year in “hidden” commissions, says a leading advisory firm.
Chartwell Investment Management says that savers are unaware that their financial advisers receive renewal or trail commission each year of 0.5 per cent, paid out of the annual management charge.
An investor with a unit trust portfolio of £100,000 would pay an estimated £6,600 in renewal commission over ten years, assuming growth of 5 per cent per year after charges.
Renewal commissions are deducted from holdings in most unit trusts, Oeics — open-ended investment companies, another kind of fund — some investment bonds and a few investment trusts.
Where investors have not used an adviser but have bought their fund or bond direct, the company simply pockets the commission. Most managers pay renewal commissions on most of their funds, but cash funds and index trackers are excluded.
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Patrick Connolly, of Chartwell, says: “The commission — usually 0.5 per cent per year — is paid in recognition of the ongoing service the financial adviser continues to give you over the years on the investment that he or she has arranged for you.
“This is fine where advisers give a service, but some do nothing to earn the commission and others are not even in touch with the investor. Yet after six years a 0.5 per cent commission puts more money in an adviser’s pocket than a typical initial 3 per cent charge.”
Three years ago Chartwell launched a cashback service that rebates part of the renewal commission to investors. Anthony Lee, a retired businessman from Rayleigh, Essex, has benefited from this deal. He holds a range of funds, including some from Jupiter, Newton and Invesco Perpetual.
He says: “In a year I receive a rebate of about £175, which is £175 more than I would have had if I had not taken advantage of Chartwell’s service.”
A few firms have followed Chartwell’s lead. They include Hargreaves Lansdown, the independent financial adviser (IFA), and CommShare, a discount broker, that launched its service at the same time as Chartwell. It offers a rebate of some renewal commission up to 50 per cent.
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Other financial advisers, such as Chamberlain de Broe, have opted to offset renewal commission against their normal fees. James Higgins, managing director of Chamberlain de Broe, says: “We think trail commission is liable to sway advisers and thus distort the market, which is undesirable.”
But there has been considerable industry opposition to Chartwell’s initiative. Financial advisers who are paid by commission, unlike Chartwell, which is fee-based, say that rebating renewal commission would be taking away part of their livelihood. They say that trail commission was introduced in the 1990s as a way of rewarding advisers for not engaging in “churning” — the unnecessary buying and selling of investment products.
They also point out that some financial firms, such as Bestinvest, the IFA, charge no initial commission but depend instead entirely on renewals. But Mr Connolly says that good firms such as Bestinvest have nothing to fear because they offer a genuine continuing service in return for the commission. He adds: “It is the firms that offer no service that, rightly, should be worrying.”
Investors wanting to unlock a share of the hidden renewal commission can do so by naming Chartwell (or another IFA that rebates commission) as their adviser in place of their existing adviser — a process known as “change of agency”. They retain exactly the same investments; all that changes is the adviser. Chartwell will then rebate part of any renewal commission it receives.
LINKS
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Chartwell: 01225 446556, www.chartwell-investment.co.uk; Chamberlain de Broe: 020-7584 3300, www.cdbroe.com; Hargreaves Lansdown: 0800 1380456, www.hargreaveslansdown.co.uk; CommShare: 0808 1005045.