A new report published by Consumer Focus has highlighted serious problems with personal pension switching and the growing trend for advisers to charge trail commission ahead of a commission ban.
The report, ‘Is it advisable? An investigation into switching and advice in the individual personal pensions market’, identified three main features of the personal pension market which continue to cause consumer detriment.
Firstly, some investors are being advised to switch their personal pensions to different products, often with higher charges or higher risk.
Much of this ‘churn’ is unnecessary and could leave investors worse off in retirement due to higher charges.
Secondly, there is a growing trend for financial advisers to add ‘trail commission’ to personal pensions they recommend.
This comes ahead of the commission ban being introduced by the Financial Services Authority (FSA) at the end of next year. From 1st January 2013 onwards, advisers will need to pre-agree their charges with investors.
Finally, the disclosure of costs and charges in the personal pension market remains complex and opaque.
This makes it very difficult for investors to compare like with like, preventing them from shopping around and establishing if an option represents good value for money.
There is growing anecdotal evidence in the retail financial services sector that some financial advisers are making the most of the period of time ahead of the commission ban to create trail commission payments which will continue after the ban.
Whenever you receive pension advice, it is vital you take the time to understand what is being recommended and how it improves your financial position.
Investors should never pay trail commission to their financial adviser unless they receive a defined ongoing service.
This ongoing service will differ depending on the adviser, but would typically include a comprehensive annual review of your financial arrangements and portfolio rebalancing to mange the risk of your investments.
One solution to help avoid the issues highlighted in the Consumer Focus report is to pay fees for advice.
By paying for advice, you remove the potential for commission bias which clearly exists today, particularly in the pension switching market.
Paying a fee means that the adviser has no commercial motivation to recommend an unnecessary switch to a new pension product. It will focus the adviser on demonstrating value for money.
If you are concerned that you are paying for trail commission without receiving any ongoing service, the good news is that it is relatively simple to switch to a new IFA who will provide this service in return for ongoing payments.
To find out if you are paying trail commission, which comes from charges on your pension product, check the illustration your financial adviser provided when they made the recommendation to switch products.
The illustration will contain a commission disclosure, which is typically on the final page of the document.
If this commission disclosure makes reference to the payment of commissions in addition to the initial amount, ask your IFA what they are doing to justify this payment each year and move to a new IFA if necessary.
Photo credit: Flickr/Yutaka Tsutano
