By James Thorneley The cost of sales through tied agents is significantly greater than the equivalen...
By James Thorneley
The cost of sales through tied agents is significantly greater than the equivalent commission paid to IFAs, according to the PIA's 1999 disclosure report.
The report shows that a five year total commission on a 25-year unit linked personal pension plan would range from £149 to £575, while for a company representative the total 'cost of advice' over five years could range from £288 to £1,086.
Even so, it highlights that the maturity reduction in yield would be on average 1.7%pa for both. For unit trusts/Oeics on a £5,000 lump sum investment the average initial commission for tied agents is 4.68% compared to 2.95% for IFAs. Renewal is also higher, averaging 0.57% for tied agents compared to the intermediary average of 0.47%.
The highest initial commission paid to company representatives is 12.87% compared to 5% as the highest commission level paid to IFAs.
The 1999 disclosure report is likely to be the last time IFAs and consumers alike will be able to see the separation of commission and advice costs from investment product charges. The FSA has said it is unlikely to feature in its league tables, even though its presence in the PIA disclosure reports has been attributed to lowering charging levels and increasing consumer understanding.
The report shows that on a 25 year personal pension plan IFA commissions have dropped, as a percentage of first year's premiums, from 67% in 1998 to 56% in 1999. The decrease has been less for company representatives, dropping from 75% in 1998 to 72% in 1999.
Overall charges to consumers on investment products have fallen up to one-fifth over the past five years.
Jackie Blyth, spokesman with the FSA, said: "There has been a change in the marketplace, which we think has been partly prompted by the introduction of low-cost stakeholder pensions and Cat-marked Isas. Many providers are already trying to meet the benchmark standards for costs on stakeholder at the front end, although they have not met the benchmark on surrender values. There has also been a natural fall in prices due to increased transparency."
Commission levels on unit trusts and Oeic products have fallen but not significantly during the period, suggesting that product providers have squeezed margins but IFA income remains relatively secure.
The report also highlights a significant recent change where charges on tracker funds had been dropped so that they would be eligible for the Cat standard.
Blyth added that commission levels may have found their natural level for the moment. She said: "Once consumers become more proactive, we could see them turning around to IFAs and asking for a reduction in commission. We would encourage consumers to do so now."
So far there has been little evidence collected by the FSA to suggest that buying direct is a dominant method of carrying out business. Only 1% of pensions are bought without advice and 20% of investment funds are sold direct.
While the FSA has said its forthcoming league tables will be constructed differently from the disclosure report, there is concern that the costing figures listed may be presented in a similar manner.
Gary Marshall, head of sales and marketing at Aberdeen Asset Managers, believes the costing of some products in the disclosure document are misleading and this could be perpetuated in league tables. He pointed out that the stated initial charge on unit trusts is sometimes quite different from fact.
He said: "Many intermediaries negotiate charges on products with fund management groups which are lower than actually stated. There will also be confusion if one product has a low initial charge and a high annual charge and a similar product has a high initial charge and a low annual charge."
In the disclosure report investment products are listed alphabetically, alongside their charges and the anticipated return over five and 10 year periods once the charges are taken into account. For pension and with-profits products charges are listed along with the various commissions for IFAs and tied agents.
For personal pension plans, the disclosure document shows the total level of commission IFAs will receive over five years and the cash maturity value. As part of the league tables commission payments will be included in the overall indicator of price.
Within the unit trust/Oeic listing in the disclosure report, the cheapest initial charge on an actively managed fund is 0% with Norwich Union UK Growth. The highest is 12% with Cavendish Opportunities. However, what proportion, if any, of the initial charge goes to pay for advice is not displayed.
Instead of including initial, annual and exit charges, Marshall suggested the FSA use Total Expense Ratios (TERS), which can provide an easier comparison between products and so increased transparency.
The AITC recommended in February that TERs be more widely used to judge industry charging levels. The trade body is looking to put TERs of its members products on its website and it has already commissioned research into whether unit or investment trusts have lower overall charges to consumers.
Its research found the total expenses of retail equity unit trusts and Oeics are 60% higher than the size-weighted average total expenses of investment trusts in a comparable universe of funds. The size-weighted average total expenses for investment trusts was 0.83%, which was 0.55% lower than the size-weighted average total expenses for retail equity unit trusts and OEICS, at 1.38%.
According to the FSA, the league tables will place products into five different categories according to their cost. Category one will be the cheapest and category five the most expensive.
Marshall said: "What you will see being created are artificial prices. Groups will set their prices to just fit inside the top of a certain categ
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