Too few people realise that buying a financial product from a commission-based adviser could continue lining the adviser's pockets for as long as you own the product. This might be fine if they continue looking after you in return, but many don't. Neglect this and you could lose out on receiving either valuable ongoing advice or potentially thousands of pounds of commission rebates.
How do commissions work?
Commissions are a payment made by financial product providers, e.g. fund managers and insurers, to a financial adviser who sells their product. The commission is normally built into the product charges, so the costs of buying direct or through an adviser are often the same.
Commission comes in two flavours: initial and trail. Initial commission is paid to the adviser when you buy the product while trail commission is usually paid each year, often as a percentage of the investment value, for as long as you own it.
The amount of commission paid varies between products and providers, but for a unit trust is typically 3% initial plus 0.5% trail (which is paid out of a usual initial charge of 3-5% and an annual charge of 1.5%). For example, a £10,000 investment might pay £300 of initial commission plus £50 a year thereafter (or whatever 0.5% of the fund value is equal to).
Why do advisers receive trail commission?
In theory trail commission provides financial advisers with an income that allows them to spend time looking after their existing customers, rather than having to devote all their time to chasing new business. For example, if they sell you a unit trust or pension it makes sense to review things at least once a year to ensure all is ok. In most cases trail commission should cover these costs.
How do I know if an adviser is receiving trail commission?
An adviser is obliged to make it clear how they’re paid and what service you can expect to receive in return before you become a customer. However, if they didn’t, or you’ve forgotten, then simply call the adviser or product provider and ask them. Unfortunately it’s rare for product providers to detail any commission payments on the valuations and statements they send you.
Can I move trail commission to another adviser?
Yes! If you’re unhappy with your existing financial adviser then switching the trail commission to a new one is usually as simple as writing a short letter or signing a form supplied by the new adviser. It’s known as transferring the ‘agency’ on the product and normally costs you nothing. You should obviously vet the new adviser to ensure you’re not jumping out of the frying pan and into the fire – make sure he or she agrees to provide you with a service you’re happy with in return for the trail commission they’ll receive.
Can I receive the trail commission instead?
Yes, but it’s slightly more complicated than it needs to be. Product providers only pay commission to financial advisers who are authorised and regulated by the Financial Services Authority (FSA), i.e. they’ll refuse to pay commission directly to you.
However there are a few advisers, called ‘discount brokers’, that won’t give you any advice but will rebate some, or all, of the trail commission they receive (expect a small admin fee if all commission is rebated). If you’re comfortable looking after your own financial affairs then opting for this route could, over time, save you thousands of pounds or more.
You just need to transfer the agency on your existing investments/products to such a discount broker and they’ll either arrange to have the commission re-invested or sent to your bank account.
Does this mean a fee-based adviser is better?
Not necessarily. A good fee-based adviser should charge you a fair hourly or fixed rate and refund all commissions they receive. This (in theory) removes any product bias caused by commissions and ensures you only pay for the service you receive.
However some fee-based advisers charge annual fees as a percentage of your investment value, which risks the same problem as trail commission – you might be charged for a service you don’t receive.
The FSA is planning some big changes in the world of financial advice and commissions from 2013. One the key plans is to replace commissions with ‘customer agreed remuneration’. This means products will no longer be able to build commission into their charges. If an adviser wants to charge you via the product, rather than you paying them directly, you’ll have to agree this in writing and the charge will be explicitly added.
If you’re unhappy don’t sit still!
If you’re unhappy with your current adviser then sitting still could be a very expensive mistake.
Should you need ongoing advice and assistance then look around for a better adviser who’s prepared to look after you in exchange for the trail commission paid on your investments and/or pension. Switching across should cost you nothing.
Otherwise reclaim some, or all, of the trail commission yourself by using a suitable discount broker. If a discount broker refunds all the trail commission they’ll charge a fixed admin fee instead, but this should still leave you in profit if you have a few thousand pounds or more invested.
Useful Information & Links
To read more about commissions and fees read our financial advice page and Guide to Trail Commission Rebates.
Want to know how much trail commission could be costing you? Use our Trail Commission calculator.
To find a list of Independent Financial Advisers in your area visit www.unbiased.co.uk.
Below is a list of the more competitive discount brokers you might find helpful (you can view a comprehensive list in our Guide to ISA Discount Brokers):
|Refund all initial commission but take trail commission. Expect research and ongoing advice in return.||Refund all initial and some trail commission. Expect research and relevant information in return.||Refund all initial and trail commission in exchange for an admin fee. Expect some administrative assistance.|
|Alliance Trust Savings|
*Advice given on portfolios of £50,000 and over.