Why do insurers allow advisers to choose ARF commission rate?

[AJAM]

Off the top of my head, I can't think of any manufacturer that will sell you their product at reduced / wholesale prices if you buy directly from them. I'm thinking phones, cars ... maybe there are but I can't think of any right now.

Tesla
Nike
Adidas
Dell
Apple
Ryanair/Aerlingus/etc.
Dyson

The internet has changed things, you can buy whatever product you want directly from a manufacturer.
For the financial services industry, it should be even easier than for physical manufacturers.

I agree that a good financial advisor or broker is the best option for a lot (maybe the majority) of people. But not everyone needs advice.

Specifically, for PRSA's, to my knowledge, you can't go direct to any provider. If you want to invest in passive index funds in your PRSA (as opposed to the lifestyle strategy), then the only differentiator between providers is fees.

 

[Steven Barrett]

Initial Units, that’s a real blast from the Stoneage.

Talking of which, a mate asked me to look at his pension as it's not performing. Some of his pension is in With Profits earning a return of 0%. A portion has initial units and he is being charged 4.75%. Did the calcs on whether he should take the penalties now and transfer out to a cheaper contract and he would make a gain of 34% on projected returns.

 

[Duke of Marmalade]

Talking of which, a mate asked me to look at his pension as it's not performing. Some of his pension is in With Profits earning a return of 0%. A portion has initial units and he is being charged 4.75%. Did the calcs on whether he should take the penalties now and transfer out to a cheaper contract and he would make a gain of 34% on projected returns.

I can believe it.

 

[Steven Barrett]

Tesla
Nike
Adidas
Dell
Apple
Ryanair/Aerlingus/etc.
Dyson

The internet has changed things, you can buy whatever product you want directly from a manufacturer.
For the financial services industry, it should be even easier than for physical manufacturers.

I agree that a good financial advisor or broker is the best option for a lot (maybe the majority) of people. But not everyone needs advice.

Specifically, for PRSA's, to my knowledge, you can't go direct to any provider. If you want to invest in passive index funds in your PRSA (as opposed to the lifestyle strategy), then the only differentiator between providers is fees.

That's not correct. A Nike store is the direct sales team of the manufacturer. You do not get manufacturer prices from a Nike or Adidas store. Same with the computers.

In fact, I can get an iphone 12 for €50 cheaper at Harvey Norman than I can from Apple.

 

[time to plan]

The issue is the defacto protectionism, facilitated by the insurance companies. Its no coincidence that going direct costs the same as the broker charge. If your argument is truly about legitimately earning your commission then I'm sure you would have no problem if there was direct access available to the products at the 0.5% AMC or even at say 0.65% retail rate.



This is the crux of the issue for me.



From a broker perspective! That's just not the case from the client perspective. Earing slightly less as an underperforming fund bobbles along is not linked to performance in my eyes. No hurdles, no benchmarking, no sunset on the commission, how is it linked to performance? Income is dependent on the resilience of the client to keep committing their capital.

When I was looking at Zurich Exec Pension, I found better deals available going via a broker than by going via Zurich tied agent.

 

[Wollie]

@Duke of Marmalade showed why it's completely inappropriate to compare what's happening with ARF's to other service businesses.

Very few people would seek to discuss fees with their medical consultant, certainly not me. And the same with your financial advisor.
Perhaps naively I believe that my medical consultant’s fees have been decided by some process of governance that ensures it is not at his discretion. The analogy that OP is referring to is that the system has given my consultant a tick box to charge between €150 and €750. Of course that wouldn’t work as I would have to write a cheque. Or the VHI would have to pay. But in the case of the ARF it all looks pretty seamless, the life company will appear to pay but unlike the VHI the life company simply deducts that €5,000 p.a. from my policy, nothing for me to be bothered about.

This is what we should be discussing, not trying to distract from the core issue by comparing to the cost of a car, a piece of sports equipment, or whatever, from different distributors.

 

[Gordon Gekko]

People are not comparing like with like.

A company such as Zurich Life are wholesaling investment products.

It’s the broker who not only sells the product but he or she also assesses suitability etc at the outset and monitors it on an ongoing basis.

It’s up to the client to put a value on that and agree the fee.

Let’s not kid ourselves, the midpoint of 0.25% on a €250,000 fund is €625 a year.

Not exactly the Great Train Robbery.

 

[kinnjohn]

People are not comparing like with like.

A company such as Zurich Life are wholesaling investment products.

It’s the broker who not only sells the product but he or she also assesses suitability etc at the outset and monitors it on an ongoing basis.

It’s up to the client to put a value on that and agree the fee.

Let’s not kid ourselves, the midpoint of 0.25% on a €250,000 fund is €625 a year.

Not exactly the Great Train Robbery.

It could run to over 100K in fees for each client for a small pension pot over a lifetime,
A bit higher fees and pension pot and you are into 200K,

 

[Dave Vanian]

Let’s not kid ourselves, the midpoint of 0.25% on a €250,000 fund is €625 a year.

...and in reply...

It could run to over 100K in fees for each client for a small pension pot over a lifetime,

At €625 per year (and assuming that the fund size is not being reduced at all by withdrawals) it would take 160 years before the fees would run up to €100,000. I suspect the client might have died before then.

 

[Duke of Marmalade]

Poor @Wollie he finds it so hard to keep this on topic - the broker lobby protesteth so much.
But I think I can summarise some relevant consensus. €5,000 per annum trail fees for a €1m ARF is scandalous and equally scandalous is that the providers make it so easy for unscrupulous operators avail of this.

Yes I accept:
It's a free country
Most brokers are good guys and wouldn't be tempted by this gravy dangled in front of them by the providers
Financial advisers who do not engage in rip offs like this can add value

But is there anybody out there who objects to the consensus as I have stated it?

 

[Gordon Gekko]

Poor @Wollie he finds it so hard to keep this on topic - the broker lobby protesteth so much.
But I think I can summarise some relevant consensus. €5,000 per annum trail fees for a €1m ARF is scandalous and equally scandalous is that the providers make it so easy for unscrupulous operators avail of this.

Yes I accept:
It's a free country
Most brokers are good guys and wouldn't be tempted by this gravy dangled in front of them by the providers
Financial advisers who do not engage in rip offs like this can add value

But is there anybody out there who objects to the consensus as I have stated it?

So firstly, I’m not a broker, so I consider myself objective on the basis that I’ve no skin in the game.

How is it “scandalous”?

Say I was a broker and I find and cultivate a client. I’m his trusted advisor. I help him on a number of fronts. His pension needs to be looked-after. Like most people, he hasn’t a clue about risk or asset allocation. I make sure that he’s set-up in the right way and that he avoids financial pitfalls. And I have the compliance burden of monitoring suitability and capacity for loss etc on an ongoing basis.

Now let’s say I allocate the money to a provider who’s charging 0.5% and I also charge 0.5%, with no VAT ‘cause it’s an insurance company.

I see nothing wrong with that.

The client is paying 1% (no VAT) and getting decent ongoing advice.

 

[Duke of Marmalade]

So firstly, I’m not a broker, so I consider myself objective on the basis that I’ve no skin in the game.

How is it “scandalous”?

Say I was a broker and I find and cultivate a client. I’m his trusted advisor. I help him on a number of fronts. His pension needs to be looked-after. Like most people, he hasn’t a clue about risk or asset allocation. I make sure that he’s set-up in the right way and that he avoids financial pitfalls. And I have the compliance burden of monitoring suitability and capacity for loss etc on an ongoing basis.

Now let’s say I allocate the money to a provider who’s charging 0.5% and I also charge 0.5%, with no VAT ‘cause it’s an insurance company.

I see nothing wrong with that.

The client is paying 1% (no VAT) and getting decent ongoing advice.

1 down for consensus. I cited what I thought was an absolutely extreme example, hopefully never actually seen in practice but the point being that providers do make it easy for this outrageous example to happen. But it was only cited in the firm belief that no-one could honestly believe that €5,000 per annum retainer to give advice available at €1,000 per annum was reasonable. That is more than 10% of the pension which on optimistic assumptions the ARF will provide. God help the poor sucker who so trusted his adviser to throw €4,000 per annum at her for nothing. Lo and behold there is a contrarian view. That's blogsphere for you.

 

[Gordon Gekko]

1 down for consensus. I cited what I thought was an absolutely extreme example, hopefully never actually seen in practice but the point being that providers do make it easy for this outrageous example to happen. But it was only cited in the firm belief that no-one could honestly believe that €5,000 per annum retainer to give advice available at €1,000 per annum was reasonable. That is more than 10% of the pension which on optimistic assumptions the ARF will provide. God help the poor sucker who so trusted his adviser to throw €4,000 per annum at her for nothing. Lo and behold there is a contrarian view. That's blogsphere for you.

Where is the advice available for €1,000 / 0.1%?

 

[Duke of Marmalade]

Where is the advice available for €1,000 / 0.1%?

According to OP the options made available from providers is from 0.1% to 0.5%. I am not a practitioner no more than you are a broker. I accept your assertion that you have no skin in the game and that you study Dalbar reports (aimed at brokers) as a matter of academic interest. It wouldn't be my choice of bedtime reading. Hey, it’s a free country.

 

[Wollie]

Not exactly the Great Train Robbery.

Some people just don't get it.
First of all, you are conveniently ignoring the initial commission, which could be as high as €12,500 on a €250,000 investment, in addition to the trail commission. That is unconscionable.
Most important, however, referring back to The Duke's analogy with a medical consultant (though the comparison is laughable, given the educational standards required and the exams a consultant must pass, the experience they've had to accumulate, not to mention the professional standards they must adhere to), would you agree a retainer of €625 a year to a consultant, who is not even required to take your temperature, and where the money is taken straight out of your pocket, without them invoicing you for it? And don't try to pretend that it doesn't come out of your pocket, that it's out of the insurer's. It comes out of your - the client's - pocket. Make no mistake about that.

 

[_OkGo_]

How is it “scandalous”?

Haven't you answered your own question?

Say I was a broker and I find and cultivate a client. I’m his trusted advisor. I help him on a number of fronts

In your scenario, the 'client' is the product and the FA is selling them the insurance company for as much as they can get out of them. Why should previous work which the FA has already been paid for factor into how much they should get from an ARF?

I have the compliance burden of monitoring suitability and capacity for loss etc on an ongoing basis

Again, I think this is what is at the core of Wollie and Duke's comments. In real practical terms, what is this burden? Is it 10/20/40 hours of work dedicated to that client each year?

The only logical reason I can see for a range in commission is for a broker to act fairly with different clients and pot sizes. If I have a €100k pot, the broker can be very clear and tell me that it will take 5 hours of his time every year and so he needs a 0.5% commission. If the next client arrives in with a €500k pot, the same advisor can charge 0.1% because it is the same 5 hours or work. Sadly there are too may FA's who are glorified sales reps and don't protect the clients best interest

 

[Duke of Marmalade]

The only logical reason I can see for a range in commission is for a broker to act fairly with different clients and pot sizes. If I have a €100k pot, the broker can be very clear and tell me that it will take 5 hours of his time every year and so he needs a 0.5% commission. If the next client arrives in with a €500k pot, the same advisor can charge 0.1% because it is the same 5 hours or work. Sadly there are too may FA's who are glorified sales reps and don't protect the clients best interest

Great point. Let us start at the very beginning. Why do providers get involved at all in the fees paid for advice by a client to her advisor, nothing to do with the provider, and why the variable percentage?
1. The VAT angle makes commission more tax efficient than direct fees. I'm all for tax efficiency so that is a good reason.
2. There will be a large fixed element to the advisory service and so I can see the need for a variable ad valorem percentage.
So there is a valid justification for the facility but it leaves wide open a gap for the unscrupulous, a gap which I have illustrated by the €5,000 p.a. retainer for the €1m ARF.
Amazingly @Gordon Gekko sees no difficulty with that size of gap. Goes to show that the scope to rationalise the most egregious of rip-offs is unfortunately part of the human condition. If someone with "no skin in the game" like GG can do it, someone with €4,000* p.a. for ziddly twat dangling in front of her will have little difficulty wrestling with her conscience.

So OP's most relevant question is - what do providers do to monitor that some brokers are not driving a coach and horses through this gap?

* assuming that €1,000 is a reasonable fee for the service

 

[gkp]

I have had a quote from an ARF provider (direct team) for 100.5% allocation and 0.5% AMC. ARF value approx €1m.
Am I likely to get a better allocation and AMC with a broker/advisor or is this as good as it gets?

 

[Gordon Gekko]

That’s pretty competitive.

 

[GSheehy]

I have had a quote from an ARF provider (direct team) for 100.5% allocation and 0.5% AMC. ARF value approx €1m.
Am I likely to get a better allocation and AMC with a broker/advisor or is this as good as it gets?

If you were comfortable with an execution only service you'd probably better it, at that level of fund. But, that type of service isn't suitable for everyone.

Gerard

www.prsa.ie