Login

Money Times - Febuary 14, 2017

Posted by Jill Kerby on February 14 2017 @ 09:00

GETTING CHARGES DOWN BOOSTS INVESTMENT RETURNS

Investment funds that are sold in Ireland come with fees, charges and commissions, charges that will impact on the on-going and final value of your investment, especially a long term one, like a pension fund.

It is only in the past two decades that investment fund providers have been required to disclose all these charges in writing, yet anecdotal conversations that I have had over most of those years with readers, too often resulted in either the person telling me that they have no recollection of any discussion about charges or no recollection of the charges even if they did have such a discussion.

The reason why it is important to have a full grip on product and fund charges is to make it easier to shop around for the most suitable product and to compare how different charges can affect the value of your investment. The lower the charges, the better the long term financial outcome.

Since this can be time-consuming and complex, it’s always a good idea to use a good, independent, impartial broker or adviser. Otherwise you might be tempted just to settle with the best advertised product from a well know life assurance or investment company that, naturally, will only sell you their product.

The problem is that the vast majority of financial intermediaries in this country are paid by sales commission – that is, a small percentage of your investment contribution either upfront when the money is paid over to the investment company or as a ‘trail’ commission, usually over a period of years.

The commissions they receive will usually differ – some will be higher or lower.  It is in their personal financial interest, or that of their brokerage to sell product that carry the highest sales return.  And since not every prospective client who walks into their office will actually buy an income protection policy or a pension, or an investment fund for their children’s third level education, the commission they do collect from every third or fourth potential client needs to be sufficient to cover the salaries and overheads.

A fortnight ago, Aviva Life and Pensions announced that as part of a major review and streamlining of their products, that they were eliminating all policy fees and charges for new customers on their list of 23 different fund. These include old monthly policy administration fees that could amount to as much as €4.50 a month (another life company charges as much as €5.24 per month) and fund switching fees of c€20. There is now only a single management fee per fund, amounting to no more than 1% of the fund value. Over the course of a long term investment, like a pension, the savings could amount to as much as 8% of the fund value, I was told. (For a fund worth €500,000 that is the equivalent savings of €40,000.)

Meanwhile, last week the Central Bank announced that it is now reviewing the hundreds of submissions it received as part of its inquiry into commission payments to financial intermediaries. It will publish its recommendations later this year. 

Many of the industry submissions – from fund providers as well as brokers – favour maintaining the existing commission system on the grounds that fee-based advice would be too costly for the majority of Irish investors. Many added that in the UK, where commission has been abolished since 2012, there are now fewer intermediaries. If buyers do not pay an upfront fee, they must go directly to the manufacturer and lose the opportunity for independent advice.

What most of the supporters of commission always fail to note is that commission payments are paid by the buyer out of the money they hand over to be invested or from premiums collected for the life assurance product.  There is no such thing as “free” advice. You pay overtly – a fee – or covertly – by commission that may not always be properly explained.

Aviva are the first life and pensions company to abolish extraneous and outmoded policy administration fees. They admit that computerisation and technology no longer justifies some of them.  They accept there will be an associated cost to the company, but believe they’ll benefit with more sales and happier customers.

Should sales commissions also be abolished?

So long as an intermediary depends on commission and might be influenced by its size (for example, you get no commission if you recommend a Post Office savings scheme) the adviser’s impartiality has to queried.

Commission isn’t just about the number of euro being paid out; it also leaves the broker open to a charge that their advice is centred on the “product”, not the client.

Replacing it with a fee-based payment from the client that recognises the adviser’s expertise, the time spent on your case, focuses the relationship back where it should be – between the adviser and the client. Not the adviser and investment provider.

 

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

 

0 comment(s)

Leave a comment
 

Subscribe to Blog