'Rip-off' commissions are back
Prudential now has a pension plan paying an upfront commission of 20 per cent. As Teresa Hunter reports, it is by no means the only high street giant targeting advisers
Consumers are being warned to be on their guard when buying financial products to ensure that their savings are invested on their behalf rather than lining the pockets of financial advisers charging up to 20 per cent commission.
Commission levels across the industry had been on a downward trend but three giant companies, Axa, Prudential and Scottish Widows, have introduced remuneration plans that allow advisers once again to charge sky-high commission on certain productsPrudential, for example, now has a pension paying up to 20 per cent upfront commission when the market norm is nearer 5 per cent. This means that if you are advised to begin such a pension, only £8,000 of a £10,000 investment will be made on your behalf, with £2,000 going to the salesman.
Axa too has upped its commissions for longer-term investments. If you invest in a single-premium pension for 40 years, the salesman will receive up to 15 per cent remuneration, compared with 4 per cent over 10 years, 8 per cent over 20 years and 11 per cent over 30 years.
Meanwhile, Scottish Widows is currently trialling a new Retirement Account Sipp that could earn the adviser a payment of up to 15 per cent; the insurer hopes to launch the product early next year. The company pays a standard remuneration to an adviser on sale of 5 per cent, but that can be increased by up to 15 per cent of a transfer or lump sum investment, with authorisation from the customer.
The companies claim that their intention is to improve transparency and help advisers develop relationships with clients.
Many financial advisers have described such payments as "jaw-dropping".
Alan Steel, a director of Steel Asset Management, says the commissions are "obscene". "This is a complete rip-off. Consumers won't know where their money is going. This is very frustrating for advisers trying to do a good job for their clients, because unfortunately there are IFAs out there who will sell these products," he says. "Although clients must give authorisation for 20 per cent of their investment going as a fee to the adviser, he can take 9.5 per cent without any specific authorisation."
Concerns have been raised that some advisers will push clients towards certain investment strategies and companies not because they are in the best interests of clients but because they will pay the highest commission.
Last week the Financial Service Authority announced a review of how financial products are sold. Callum McCarthy, the regulator's chairman, recently highlighted the fact that about half of new investments into single-premium personal pensions are simply money moving from one company to another, indicating high levels of recycling simply for the sake of earning commissions.
"Questions have to be asked as to how much of this recycled business is of negligible advantage to the customer. The consumer suffers from product bias, provider bias and churn," says McCarthy.
The return of high commissions is the result of a new remuneration system under which the adviser charges a fee but this fee is not paid by the customer writing a cheque – instead it is taken by way of a commission from the policy he recommends.
The Pru argues that the remuneration is designed to help customers and their advisers build long-term relationships. The insurer claims that it enables customers to see clearly and value separately the advice they receive. Insurers also argue that taking the fee out of a tax-exempt pension is highly tax-efficient as the adviser can be paid out of the gross payments.
Marcus Price, the director of individual pensions at the Pru, says: "We've designed this pension with an eye to the long-term relationship between the adviser and the client. It is completely transparent, as the client would have to authorise this level of fee. There are no additional charges anywhere in these products."
Peter Webb, a pensions spokesman at Axa, accepted that commissions had risen on some products.
"Our starting point is that there is no longer any commission paid as such. At the outset the adviser and client sit down and decide how much work is involved and what this advice will cost, because it must be paid for somehow," he says. "Then, having decided a fair price for the advice, the adviser comes to us and we pay this money out of the policy. The cost has to be reasonable and credible."
Scottish Life, the first company to introduce this hybrid approach to adviser remuneration, describes it as a half-way house between commission and fees. However, it caps the amount it will pay to advisers at 7.5 per cent.
"Many people have the idea that they would prefer to use a fee-based adviser rather than one remunerated by commission, as they think this way they are more likely to receive impartial advice. However, the truth is that they do not like getting their chequebooks out and actually writing the cheque. This way they don't have to. The adviser can bill us for the fees instead," says Alasdair Buchanan of Scottish Life.
A Sunday Telegraph survey of the big pensions companies revealed that most, including Norwich Union, Standard Life, Clerical Medical, Friends Provident and Scottish Widows, cap their single-premium pension commission at 5 per cent. Aegon was slightly more expensive with maximum commission levels of 8.5 per cent, but still a long way behind 20 per cent. Advisers indicate that they would find it hard to justify taking more than 5 per cent commission. Hargreaves Lansdown caps its standard fee at 3 per cent.
Anna Bowes, a pensions spokeswoman for AWD Chase de Vere, which relies on commission income, says: "I have never heard of commission levels as high as 20 per cent. I don't see how this can possibly be justified. We find most customers prefer commission, but at these levels it smacks of just trying to pull in business. Unfortunately there are still some unscrupulous commission-driven advisers out there."
Michelle Cracknell of Origen says consumers must insist that some of this money is reinvested on their behalf. "Commission should relate to the advice given and work done. Where it exceeds this, it should be reinvested on the client's behalf."
But Nigel Bunting of Suffolk Life, the Sipp provider, reckons the new system is fair. He says many clients opt for commission to avoid paying the IFA from their own pocket. "IFAs who recommend our Sipp agree their remuneration with the client, on a fixed-fee or percentage basis," he says. "It all has to be agreed and authorised by the client – totally fair, I think you will agree."