Trail commission gives advisers an incentive not to switch funds
Many years ago a good friend, who at the time worked as a financial adviser, gave me a piece of advice: “Always pay fees for advice, never opt for commission – fees are ultimately a fraction of the cost of commission.”
Needless to say, he is no longer a financial adviser. But he was correct.
Last year we saw a tremendous flurry of activity before commission payments on pension plans to corporate advisers was scrapped on 31 December. Many employers were convinced to switch pension providers so their adviser could have a last gasp grab at a hefty commission.
This dreadful practice often found employers, and certainly their staff, unaware of the true costs of their scheme to the extent to which some even believed they were getting their scheme for free. It is especially damaging because commissions are taken out of contributions, greatly eroding employees’ long-term investments.
Any pension schemes put in place under the old commission system now have an added burden to bear (and fear).
Contracts signed before 31 December 2012 have until May this year to implement them. Advisers who put them in could well be loath to recommend any changes that will stop ongoing (trail) commissions being paid out. Many in the industry are, consequently, concerned that these schemes and their investment funds choices will grow old and dated (see also Governance vacuum for contract-based pension schemes).
A good place to start is by having a good pensions governance committee at your organisation so the full burden does not just land on HR.
Be aware, and be wary – this is a potential misselling scandal, especially if employers auto-enrol staff into a scheme that is not (on an ongoing basis) the best it could be.