If you are considering selling personal pensions online then there is no better place to learn than ...
If you are considering selling personal pensions online then there is no better place to learn than from the successes and failures of the pioneers. Here we put two new websites through their paces.
If you ignore the advice issue for the time being, the main problem at present with selling on the net is that the chief attraction - a reduction in the sales commission - is undermined by the obscurity of the commission system itself. The percentage reduction looks impressive, but it is far from easy to discover what it is worth in monetary terms until you are well into the sales process.
For the investor who cruises from site to site it is well nigh impossible to compare the value of, say, the 20% discount of an unknown sum offered by First Global* with the 90% reduction in an equally elusive figure offered by DiscountPensions, which is run by the actuarial firm Geoffrey Bernstein & Co*.
To be fair this is not the fault of the advisers. Each insurance company has its own commission scale and will vary the rate according to the size of the premium and the term of the contract. The more clients invest and the longer they invest for, generally the more they will pay in commission. Insurers also tend to pay preferential rates to advisers who sell a lot of their products.
Moreover, there are different commission rates depending on whether you pay a series of single premiums, where each contribution is treated separately, or opt for a regular premium plan, where the bulk of the commission payable for the entire investment period may be paid up front. But then again it may not.
If consumers end up a tad confused who can blame them? Quite simply, there is no benchmark they can use to judge value for money before they get into the boring paperwork.
One option here would be a fee-based system, where the adviser charges a flat fee, or perhaps a scale of charges, for the basic range of purchase options. However, most fee based advisers say that they do not link their charges to the sale of products - only to the advice.
The net is not an ideal medium for one-to-one pensions advice, so it will be interesting to see how many fee based advisers, if any, manage to overcome these obstacles and achieve a happy compromise for the internet without selling their principles down the river.
In the absence of genuine clarity on charges, commission-based online advisers attempt to show the impact of charges - and their discounts - by projecting what a fund would be worth for a given investment after certain periods, assuming an investment return of 7%. One column gives the figures where normal commission is deducted and a second shows what the fund would be worth where the reduced rate is applied. All of which is very interesting but it still doesn't tell investors what they are paying in monetary terms.
In practice there are two ways investors can make meaningful comparisons between the value of the discount offered by different advisers. The hard way is to look at the charges levied by the insurance company - in particular the initial charge (or bid/offer spread), which is usually about 5%, and the allocation rate - the amount of the premium actually invested once the initial charge has been taken out. The method by which the sales commission is deducted from one or both of these charges adds new meaning to the word 'convoluted' and is as good an argument as any for ditching allocation rates once and for all.
The not-so-difficult way (there isn't an easy one) is to apply for the same quotation from different online advisers. After a day or so the adviser, or the company to which the investor applies, sends a key features document which, among other details, sets out the commission payment to the adviser (at last!) and the value of the fund if the investor stops after certain periods.
The two most useful figures here are the reduction in yield and the fund value after one year. However, the canny investor will also look at early surrender values throughout the investment period, particular on a long-term plan. Rumour has it that some companies have improved one year, early surrender terms at the expense of the medium term in order to make their products more marketable.
The key features document, therefore, provides a fairly accurate indication of how much the investor is paying for the service and - equally important - the impact of any charges and penalties imposed by the insurance company if they pull out early. Commission is, after all, only part of the story.
DiscountPensions will send out sample key features documents after the browser completes its sample form online. With First Global you have to complete the full insurance company form - a lengthier procedure. However, First Global said that later this year it should be able to show the key features document online, which would be a very welcome development.
As a rough guide, First Global said it would expect a commission of between £250-£300 for a single premium of £5,000, 20% of which is reinvested in the plan. The amount for a £200 per month, 20 year regular premium plan varies considerably depending on whether the insurance company pays all the commission up front or spreads it over the investment term. For example it might pay £120 up front plus 0.5% of the fund value per annum thereafter, or a single lump sum of £1,600 with no renewal commission.
Discount Pensions makes an administration charge of £25 and works on a single premium basis for all sales. It would normally receive 1% of each premium but at the time of writing it had cut this further to just 0.5%. This would appear to be very good value, particularly for large single premiums.
It is important that the investor realises that it is not possible to get a better discount by going direct to the insurance companies offered by these two advisers. In fact, given the single pricing of products, they would
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