Why do insurers allow advisers to choose ARF commission rate?

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Wollie

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Some insurers allow advisers to choose their own trail commission on ARF's. The insurer recoups the cost through an identical adjustment to the management fee charged to the client. Do the insurers demand higher service levels in return for higher commission. If not, how do they justify the resulting lower value for their customers?
 
As far as I know, all ARF providers allow advisers this flexibility. The regulations stipulate that if an adviser chooses to take trail commission, the adviser must demonstrate what services they are providing in return for that trail commission. It's not the ARF providers' role to police these regulations, nor to fix prices. They just provide the vehicle for collecting the trail commission and paying it to the broker.

If Brown Thomas sells a product for €100 and another shop sells the same product for €75, that's a matter for the sellers, not the manufacturers.

Consumers should be aware that if their adviser is proposing to charge trail commission, they should know what service they're getting in return and if they're not happy, challenge it or shop around.
 
Brendan Burgess said:
What percentage of customers of investment intermediaries have ever heard of trail commission?
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Good question. Furthermore, a simple calculation indicates that trail commission alone could mean that the intermediary makes twice as much from the ARF as the customer could expect to earn.
The calculation is as follows: Assume a gross annual return on the ARF of (say) 1.5% a year, which is generous, given current interest rates of zero or less, and the conservative investment strategies for ARF's. Assume also an insurance company management fee of 0.75% a year. Intermediary commission can be as high as 0.5% a year. This means just 0.25% a year on average for the customer, or half what the intermediary makes - without having to do a tap of work after the initial sale.
How can that be justified?
 
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@Brendan Burgess As I'm sure you'd guess, only a well-informed customer or Askaboutmoney regular would know what trail commission is. So I'd say the percentage is very low. There is a legal requirement for an intermediary to provide written details of all remuneration at or before point of sale. The problem is that there are so many other legal requirements around information to be disclosed that an intermediary can choose to bury the commission disclosure among about 30 pages of other disclosure documents.

I'd like to see there being a one-page, easy to read document which includes disclosure of all charges in a simple format - "If you invest €100,000, the ARF provider gets €X, the broker gets €Y and the fund manager gets €Z." It should also include a Reduction in Yield (RIY) figure. "The combined effect of these charges results in an overall cost of YY% per year, which will reduce your investment return by this amount."

While the percentage of customers who would know about trail commission would be small, I think there's a bigger percentage would be willing and able to ask an intermediary "what are you getting paid out of all this?" Faced with a straight question like that, I would hope that a broker would be honest in the answer. So I'd recommend asking the straight question.

Wollie said:
- without having to do a tap of work after the initial sale.
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@Wollie - I'm quite critical about many aspects of the pension industry, but what you're talking about here is simply illegal. The regulations are clear that if an intermediary chooses to take trail commission, they must be able to show what work they're doing in return for it. So if you come across an intermediary who is proposing to take trail commission and not do a tap, they should be reported. So in answer to question - how can this be justified - it can't.
 
Dave Vanian said:
The regulations are clear that if an intermediary chooses to take trail commission, they must be able to show what work they're doing in return for it.
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What does this mean? How can they show "what work they're doing"?
First of all, are we talking about CBI regulations? Could you quote chapter and verse for me, please?
Is it sufficient for them to say something on the lines of "I will check regularly that the funds in which my client's money is invested are performing as expected"? My fear, from what I've heard in the market, is that some intermediaries (hopefully very few) wait five years (or whatever is the time required to 'earn' the commission received at time of sale) and then advise the client to move to another company, giving the intermediary an opportunity to earn initial commission again - and more trail commission, of course, but only on condition that they keep to the law and demonstrate that they will keep an eye on things and be prepared to move the client after another few years, in order to earn even more commission.
Sorry, cynicism got the better of me.
Hopefully, you'll set me right and demonstrate that intermediaries really have onerous legal responsibilities and that they discharge those responsibilities in a professional manner.
 
Wollie said:
What does this mean? How can they show "what work they're doing"?
First of all, are we talking about CBI regulations? Could you quote chapter and verse for me, please?
Is it sufficient for them to say something on the lines of "I will check regularly that the funds in which my client's money is invested are performing as expected"? My fear, from what I've heard in the market, is that some intermediaries (hopefully very few) wait five years (or whatever is the time required to 'earn' the commission received at time of sale) and then advise the client to move to another company, giving the intermediary an opportunity to earn initial commission again - and more trail commission, of course, but only on condition that they keep to the law and demonstrate that they will keep an eye on things and be prepared to move the client after another few years, in order to earn even more commission.
Sorry, cynicism got the better of me.
Hopefully, you'll set me right and demonstrate that intermediaries really have onerous legal responsibilities and that they discharge those responsibilities in a professional manner.
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I may be wrong I am sure I will be corrected if so they are covered once they contact you with updates several times a year by post,
I think a paper trail is all they need,
 
kinnjohn said:
I may be wrong I am sure I will be corrected if so they are covered once they contact you with updates several times a year by post,
I think a paper trail is all they need,
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Thanks @kinnjohn Given that no-one has corrected you, you seem to have got it right. Not a particularly demanding standard of care , is it?

I wonder if an adviser/broker taking commission of 0.5% a year has to show that they have done more work for their client than one taking one-fifth that amount, i.e., 0.1% a year?

Dave Vanian said:
It's not the ARF providers' role to police these regulations, nor to fix prices. They just provide the vehicle for collecting the trail commission and paying it to the broker.
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Is it anyone's role to police the regulations? If so, what does policing entail? If not, do the regulations mean anything?

The ARF provider cannot wash their hands of responsibility as easily as you claim. They have a contractual relationship with the client, a more enduring one than that of the broker/ adviser, since they will have to fork out on the contract eventually. How can they stand over one client getting far worse value than another, for the sole reason that they caved into a demand from the broker/ adviser for higher commission, without checking that the adviser is doing anything to justify it?

While admitting that I may have misunderstood key aspects, the entire system seems to stink to high heaven. How can anyone - insurance companies, compliance officers in advisory firms, or the CBI - stand over it?
 
My 2 cents

The CB is pretty useless and the business model for brokers is highly dependent on this trail commission nonsense.

At the ARF set up, the asset allocation and re-balancing protocols should be established. If someone has €1m in an ARF and is being charged 0.5% trail, it's almost impossible to see what add value a broker would give me on an on-going basis. It is possible that I may need specific advice on occasion - but I'd much prefer for this to paid for as and when and if needed.
 
Gordon Gekko said:
Does the broker not have ongoing obligations such as reassessing suitability regularly?
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So I'm told. I'm asking what that implies in practice. Is @kinnjohn right in saying that a paper trail is all that's needed?
Dave Vanian said:
what you're talking about here is simply illegal.
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I hear you, but who decides that an intermediary is acting illegally? And how how do they make the decision? Do they have different criteria on what constitutes illegality for an intermediary taking 0.1% than for one taking 0.5% a year? Does the 0.5% intermediary have to send five times as many letters to the client, telling them how diligently they're looking after their interests?
 
There is a serious anti-broker sentiment here (and I’ve no axe to grind either way because I’m not a broker).

A paper-trail is all that’s needed for most things, but if the underlying work isn’t being done, that’s fraud and a regulatory breach.

There are dodgy brokers out there, absolutely, but there are dodgy accountants and solicitors as well.

People who use an advisor have far better outcomes on average than people who go it alone. We should all remember that when every second poster is trying to seek out the lowest cost self-chosen investment via the lowest cost pension structure.

There is reliable data from the US which indicates that people who manage their own investments make about 2-2.5% per year on average versus 5-6% for your typical 60-40 Equities/Bonds managed portfolio and 7%+ for a managed all-equity approach. Going it alone is a bad idea.
 
Firstly, for the avoidance of doubt - I am not talking about going it alone. I am talking about getting advice as and when needed. There is a big difference.

Also, Gordon - can you provide the link to the reports you are referring to please? In particular, I am interested to see how brokers would add value to the non-clueless investor. Specifically, if an investment strategy has been agreed with a broker at the outset - including re-balancing protocols - I find it hard to see where a broker could make up the 0.5% charge - let alone surpass it by the levels you've quoted.

In this - I am talking about the non-clueless investor. I am not anti-broker. I am anti not paying charges for a service that I don't understand. Can you tell me where I even might possibly get the extra 3% to 4% return that you are referring to please?!
 
Wollie said:
What does this mean? How can they show "what work they're doing"?
First of all, are we talking about CBI regulations? Could you quote chapter and verse for me, please?
Is it sufficient for them to say something on the lines of "I will check regularly that the funds in which my client's money is invested are performing as expected"? My fear, from what I've heard in the market, is that some intermediaries (hopefully very few) wait five years (or whatever is the time required to 'earn' the commission received at time of sale) and then advise the client to move to another company, giving the intermediary an opportunity to earn initial commission again - and more trail commission, of course, but only on condition that they keep to the law and demonstrate that they will keep an eye on things and be prepared to move the client after another few years, in order to earn even more commission.
Sorry, cynicism got the better of me.
Hopefully, you'll set me right and demonstrate that intermediaries really have onerous legal responsibilities and that they discharge those responsibilities in a professional manner.
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The old "5&5". Get 5% commission, wait 5 years for the early exit penalties to be finished with and then move to another provider to get another 5%.

At the end of the day, it is your money and if you are not happy with the charges, go somewhere else. You don't have to move to another provider if you don't want to or if you want to pay a fixed fee, you can do that too. It is up to you.

But remember, you are are getting a service, not a product. You can get your tax return done by PwC or by a small firm. The prices may be vastly different but you are getting the same tax return down. You need to know what service you want from the outset and have it priced accordingly.

Steven
www.bluewaterfp.ie
 
Dave Vanian said:
If Brown Thomas sells a product for €100 and another shop sells the same product for €75, that's a matter for the sellers, not the manufacturers.
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Let's develop that analogy. The customer is buying €100 of Chanel 5 perfume. The €100 is sent to Chanel. Chanel provide the customer of Browne Thomas with a bottle of 65ml and pay BT €35 commission. They provide the Dunnes Stores customer 90ml and pay DS €10 commission.
Chanel is clearly being very unfair to its customers, differentiating according as who sold the product.
The point of describing it this way is to highlight that the producer is facilitating the rip off.
 
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Gordon Gekko said:
There is a serious anti-broker sentiment here (and I’ve no axe to grind either way because I’m not a broker).
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I don't sense an anti broker sentiment. Brokers are like many, they will try and get as much as they can from a sucker. I see OP as being very anti provider for facilitating this natural greed.
If a punter wants to be ripped off it should not be by a tick box on a proposal form but a separate agreement with separate bank arrangements with her broker.
 
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Duke of Marmalade said:
Let's develop that analogy. The customer is buying €100 of Chanel 5 perfume. The €100 is sent to Chanel. Chanel provide the customer of Browne Thomas with a bottle of 65ml and pay BT €35 commission. They provide the Dunnes Stores customer 90ml and pay DS €10 commission.
Chanel is clearly being very unfair to its customers, differentiating according as who sold the product.
The point of describing it this way is to highlight that the producer is facilitating the rip off.
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I think your analogy is wrong. Chanel calculate that they can make a profit on a single bottle as long as they sell it for €65. So they sell it at €65 wholesale price to all their stockists. BT sell it retail for €100. Fred's Discount Perfume Shop sells it online for €80. Is it Chanel's job to tell BT what price they should be charging for it?

Please don't get me wrong. I'm not an apologist for any unethical brokers out there, nor do I speak for brokers in general. I can only speak for myself. Are there brokers out there who are gouging their customers for maximum commission and providing a lousy service in return? Undoubtedly. There are good and bad brokers just like any other profession.
 
Dave Vanian said:
I think your analogy is wrong. Chanel calculate that they can make a profit on a single bottle as long as they sell it for €65. So they sell it at €65 wholesale price to all their stockists. BT sell it retail for €100. Fred's Discount Perfume Shop sells it online for €80. Is it Chanel's job to tell BT what price they should be charging for it?

Please don't get me wrong. I'm not an apologist for any unethical brokers out there, nor do I speak for brokers in general. I can only speak for myself. Are there brokers out there who are gouging their customers for maximum commission and providing a lousy service in return? Undoubtedly. There are good and bad brokers just like any other profession.
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Well we can play word games I suppose. The main difference is that commission actually detracts from the product. With Chanel perfume the customer gets the same product but to be sure some pay more than others for it.
The "product" that a life assurance company is selling is the potential to accumulate savings. A 0.5% p.a. extra charge seriously detracts from the "product" as others have pointed out (awaiting GG's source that this is not the case). The real issue is that life companies make this contamination of their product easy for unscrupulous brokers to implement.
AAM should campaign for people who have signed up to these OTT trail commissions to immediately cancel their commitment and instead seek advice maybe every 5 years, possibly on AAM.
 
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