Candid Money Guide to: Trail commission rebates

If you own a unit trust, investment bond or pension purchased through a financial adviser (before 31 December 2012) then it’s likely the adviser is receiving an annual (trail) commission linked to the fund value.

Provided the adviser is giving you ongoing advice and assistance in exchange for the commission then it’s usually a fair arrangement, unless the commission is excessive.

But it’s not uncommon for advisers to stop looking after you after the initial sale, in which case you need to take action. Fail to do so and could lose out on receiving either valuable ongoing advice or potentially thousands of pounds of commission rebates.

For example, a £50,000 portfolio of unit trusts typically pays around £250 trail commission a year. Assuming an annual investment return of 6%, trail commission of 0.5% would reduce your return over 10 years by almost £3,800 versus a full rebate in this example.

From 6 April 2013 annual charge rebates outside of ISAs and pensions may be taxable - read more.

Action Points

If you’re unhappy with the service (or lack of) provided by the adviser who sold you an investment or pension then:

1. Check whether trail commission is being paid

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 – so check your original paperwork. Alternatively, simply call the adviser or product provider and ask them how much trail commission, if any, is being paid. Unfortunately it’s rare for product providers to detail any commission payments on the valuations and statements they send you.

2. Decide whether you want ongoing advice or commission rebates

If trail commission is being paid this gives you the option of either finding an adviser who’s happy to look after you, in exchange for the trail commission, or using a discount broker who’ll rebate trail commission. If you’re not comfortable looking after your financial affairs then don’t underestimate the value of good advice. But, equally, if you are comfortable then trail commission rebates could save you a small fortune.

3. Choose a new adviser/discount broker

When choosing an adviser be careful that 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.

When choosing a discount broker the main consideration is how much trail commission they’ll rebate. You might also consider whether they provide useful research and guidance.

See below for useful links

4. Transfer the agency to the new adviser/discount broker

Once you’ve chosen a new adviser/discount broker you need to switch the ‘agency’ on the investment(s)/pension(s) to the. This requires just a simple letter or form that the new adviser/broker should supply for you to sign – you don’t need to contact your existing adviser.

Once sent to the product provider(s) they’ll divert trail commission payments from the original adviser to the new one. The investments should be unaffected and transferring agency should cost you nothing.

Questions

How does commission 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 an investment 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.

Can a product provider pay trail commission to me instead?

No, although it would make life a lot simpler. Product providers only pay commission to financial advisers who are authorised and regulated by the Financial Services Authority (FSA). To receive the trail commission you’ll need to use a ‘discount broker’. They 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).

Can I change agency more than once?

Yes. Within reason you can switch the agency from one adviser to another as many times as you wish.

Do some providers refuse to transfer ‘agency’

Yes. A handful of backward thinking life insurance companies may refuse to transfer trail commission payments from the original adviser on some older policies.

Is fee-based advice better?

Not necessarily. A good fee-based adviser should charge you a fair hourly rate or fixed fee 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.

Useful Information & Links

To read more about commissions and fees read our financial advice page.

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 discount brokers you might find helpful (ALL our links are unpaid):