Fees or Commission?
Last week I was reading a QROPS article, regarding commission or fee, about a firm that sells QROPS to those with UK pensions. It has led me to write this article about Commission or Fees QROPS and come to a different conclusion from that of the article, written by an adviser based in South Africa.
A number of things stood out in the article, but the main issue related to commission on the sale of QROPS.
The firm stated that they had nearly 600 clients and that only one had chosen to pay fees, the rest happy to let the salesmen take commission. The firm went on to say that it was a “no-brainer” that commission was the best route.
I would suggest that if a client is offered transparency on commission and its additional charges, then the opposite would be true. The truth is that commission is not transparent and leads to hidden charges which a transparent fee route does not hide. Without knowing the true cost, “transparent” fees appear higher than “hidden” commission charges.
What if the conversation with the client has been like this?
“Dear Client,
We offer a Commission or Fees QROPS service.
Fees
Our initial QROPS fee is a few hundred pounds and that provides you with a qualified and regulated set of recommendations . There is no obligation to transfer or purchase any product at that stage. If we believe it is best advice and recommend a transfer, there is a 2% fee ( lower for larger investments ) to implement the recommendations. The funds offered are “clean” with no hidden additional commissions and typically cost on an average portfolio around 0.59% per annum. There are no exit penalties at any time and the fund value is the transfer value.
Commission
We will provide you with QROPS recommendations but we only get paid if you buy something from us. If you buy our product, we will be paid 7% from an insurance company and up to another 3% from the funds or structured products. The companies, in order to recoup this money, will charge you typically 100-150% more per annum than the alternative fees based model and most of these charges will be linked to the greater of the original investment or current value if higher. In other words if the investment value dips at any time, then in order to obtain the commission payments back the company will charge on the basis of the original investment value and also if you want your money accessed in the first 5-10 years then there will be a surrender or terminal charge to allow for the commissions that were taken up front which will have to be recouped.
Commission or Fees QROPS summary
Therefore, as an example, if we look at a QROPS fund of £250,000 the fees would be circa £6,000 for the fee-based service or £17,500 to £32,500 for the commission based service- i.e. 3 to 5 times the cost.The commission is paid from your invested money, which is why you are tied into the product with severe penalties for moving in the first few years.
Please let me know which model you would like to proceed with.
Yours sincerely”
The conclusion of the South African adviser was simple – as all but one of nearly 600 had “chosen” commission that the Commission or Fees QROPS argument was won hands down by Commission!
We argue the fee-based approach is a no-brainer!
Commission or Fees QROPS arguments are often based on inaccurate provision of facts. While there is huge difference between the two, the fact that all but one has chosen the commission route means the decision making process for those clients was not based on transparent facts. The commission based sale will end up reducing the fund by many tens of thousands of pounds compared with the fee-based arrangement, and it will not be as flexible in terms of future access.
Why do people choose the QROPS commission option?
Well, they never get the information in a letter like the one above. They are told “You do not pay us, the firms we recommend pay us”. Then, they are only told the only charge is 1% for 6 or 8 or 10 years ( that 1% is their commission that locks you in- it serves no other purpose). There is no mention of the fund management fees being double or more, or that structured products or UCIS funds may be paying up front commission of 3-6% and also lock in the investments.
Commission or Fees QROPS
We would suggest you always ask for a comparison of fees and commissions if you are speaking to anyone selling QROPS. The fact is that, based on our experience of what our clients have been told by other advisers, the QROPS advisers never tell the truth about the cost of commissions. The commission based scenario has tiered charges that are ignored and summarised “as an annual 1% total charge”. This is, of course, complete and utter nonsense and so the only way to get an accurate breakdown is to seek a breakdown from an adviser that focuses on fees and who would actually have have all the nearly 600 clients on the competitive fee basis.
The decision will make a big difference to your standard of living in retirement. Don’t waste it on your commission based salesman’s advice.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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