Initial commission on pension at maturation

Hi folks,

It's time for my Dad to convert his pension to an ARF and we are going through the forms at the moment. His financial advisor sent these out with some items pre-filled. One is the Initial % of Premium Commission which he set at 4% (can be 0%-4%). My Dad queried this and he was told it is standard commission etc. I'm wondering is this usually open to negotiation? I'm assuming it is as it is a box that has to be filled in. Obviously 4% is the max and is a significant amount so I think it is worth pushing back on - was wondering does anybody have thoughts on this?

Also - is my understanding correct that this Initial Commission is a once-off charge?

Your father is being ripped off. Run a mile from this. He should easily be able to get quality investment management and a QFM for 1% per year with no upfront commission. How big is the ARF?

"standard commission"? Incredible stuff. Some brokers should be put out of business.

4% would be on the higher side.

When it comes to investments with insurance companies, you have two things to look at; allocation rate and management charge. If there is a high allocation rate, in this case 104% (with the broker taking 4%), there is a higher management fee as the insurance company has to recoup that 4% it has paid out. You will also find that there on limits on what he can withdrawal each year (otherwise you could get the 4% bonus and transfer to another company, leaving the insurance on the hook for that 4%).

There are plans available where you pay the fee and get a lower management fee. As the product provider aren't on the hook for any bonus allocations, you can take as much money out whenever you want.

You also have to remember that in finance, charges are in percentages, so if it is a sizeable fund, there will be sizeable charges.

If you are not happy with the charges, you can say you don't want to pay them, it's your money (or your dad's) afterall. Also be aware of what the ongoing annual management charge is. Due to the long term nature of an ARF, you are better having a lower allocation rate (which is a once off) and lower annual management charge (ongoing charge).


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Gordon Gekko said:

Your father is being ripped off. Run a mile from this. He should easily be able to get quality investment management and a QFM for 1% per year with no upfront commission. How big is the ARF?

"standard commission"? Incredible stuff. Some brokers should be put out of business.

Click to expand...

It's in the 450k region. Considering that ultimately we are doing the leg work in terms of choosing funds 4% seems a bit rich for what I ultimately see as facilitating the transaction. Can anybody confirm if this is a one-off charge or not?

Is it possible to take our business elsewhere if he doesn't come down?

Steven - thanks for that. I'm a little unclear on how the allocation rate above 100% works. If it is 104% where does that bonus come from and why?

Apologies I'm very new to this.

The insurance company are paying out 4% of your Dad's €450k...that's referred to as a 104% allocation. The 4% surplus is then up for grabs. In this case, the broker wants all of it which is outrageous. That 4% could be split (say) 3/1 in your Dad's favour, meaning that his ARF's initial value would be €463,500 and that the broker would get €4,500 rather than the current €18k he's suggesting.

The downside to this "free lunch" is that you're Dad is locked in with the insurance company for a number of years and probably paying a hefty management fee too.

Why not find an investment manager who'll just charge you a management fee and who you won't be tied to?

The 4% is a once off charge and yes, you can take your business elsewhere. It is your money.

Don't worry about not understanding, this is the smoke and mirrors world of insurance contracts.

Insurance companies compete for business and have a number of different charging structures for their ARF contracts. In this case, they are willing to offer a bonus of 4% if you place the business with them, so €468,000. The advisor usually takes some/ all of the bonus, so he is being paid €18,000. Your dad will still have his €450,000 invested in his ARF.

The thing is, that money isn't free. The insurance company recoup this bonus over the years through the annual management fee levied on your dad's policy. To ensure that they do get it back (which is fair enough), they limit the amount you can take out each year (some are 15% of the policy, one company only allows 5%, which is just 1% above the Revenue minimum). If you do take out more, you pay a penalty. As the insurance company has to recoup the commission paid, as well as cover their own costs and some profit, the annual management fee you are charged is higher than if you paid the fee up front yourself. The effect of paying a higher management fee over the lifetime of the plan is more costly than paying the set up fee up front yourself.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Thanks everyone for your advise. That's helped clear things up.

Hi Quantum Leap,

You are doing exactly the right thing by looking at the cost structure you father is being charged on his ARF. To echo the comments above, better value in terms of net allocation rate to your father or lower ongoing annual charges are available to him. To know if he is getting good value you need transparency from the adviser into exactly what all the charges are and what commission the adviser is earning.

However I think costs are only part of the overall picture. We would advise that you do get an adviser to do some Risk/Returns analysis for you and your father. Any good adviser should be able to shift through the various providers/ options and come up with a good value cost structure. As the ARF is to provide retirement income for your father we apply 20% of the outcome to cost structure and 80% to the investment returns. Even with standard Life Company ARFs ( ignoring self admin ARFs for the moment) there can be very large differences in the investment returns for the same asset class or risk. As an example we looked at the 5 year historic returns for 'Cautiously Managed Funds' ( amongst others.). Over 5 years the investment returns from the best provider was 19.5% superior to the 'Sector Average' . Clearly this is historic and may not be repeated but when you look at this across a range of asset classes the differences are significant. If repeated/continued this over the medium term would dwarf the beneficial effect of an additional 1% or 2% upfront.
Secondly look at the level of risk required to produce these returns. We tend to use Volatility and Maximum Drawdown i.e what you would have received if you got in and out at the worst possible time, as reasonable ways to measure risk.
If you are paying an adviser any on going fee to help manage the ARF investment, get the adviser to articulate what their overall investment approach is and what relevant experience or credentials they have to be advising on investment risk.
There are no silver bullets, but we believe that when you have done the above you and your father will be in a better position to make an informed decision as to his ARF.

What I find is ironic is that the 'better' advisers out there will do the above analysis for you, probably for a fee to avoid you being tied to them in case you dont agree with their ultimate recommendation, and at the same time provide you better value on the ARF than what your fathers current adviser is offering. What value are they adding?

The challenge for many is to find the 'better adviser' but there are plenty of advisers who post on this site to help educate and advise people to avoid the obvious pitfalls. You could make contact with a couple of them and you can ask about their service, their credentials and what they charge.

I hope this helps. Vincent