New disclosure regulations for investments into financial products have obliged providers to make major changes to how pension fees and charges are presented to investors.
These rules apply to all investment funds, pension plans, and QROPS trustee fees. Not only must pension fees and charges be disclosed before an adviser can complete an application, but customers should also be informed at least once a year of the total charges paid.
These changes are to be welcomed. Often in the past, the real costs of making an investment or transferring a pension weren’t apparent until it was too late to change them. As a result, some customers then look for a new adviser or investment provider to release themselves from unnecessarily expensive financial structures.
However, the new adviser will also need to charge a fee for transferring the customer's account. So, although cost savings can be secured in the longer term, an inevitable consequence will be a little short-term pain. Most professional advisers will be more than happy to provide comparative illustrations to show the progression of pension fees and charges in the future and cost savings that can be achieved. Surely it’s better to know the full cost of making an investment before going ahead.
Despite the new regulations, product providers and some advisers still engage in a somewhat opaque way of presenting fees. You don't have to be Sherlock Holmes to detect where you might be over-charged. However, you may need to use a magnifying glass to identify some fees.
So, where are pension fees and charges applied, and what can you do to ensure you are fully informed before proceeding with an investment?
The structure of pension fees and charges
Be wary of companies with complex ownership and regulatory structures. Layers of employees and management in the food chain will result in more mouths to feed. Some advisers employ 'co-ordinators' whose job is to find prospective clients for the company. Often this begins with a cold call and an offer of a 'free' consultation.
You then move on to the adviser, who, hopefully, will listen to your requirements and recommend a course of action. The adviser will most likely report to a Sales Manager, who reports to the Senior Directors. Of course, if the company is part of a Network, the owner will also have to share fees with them. And don’t forget administrators and their managers!
Everyone in the chain needs to be paid; the pension fees and charges schedule reflects this as everyone takes a slice.
Is all this necessary in the age of technology and online solutions? Nowadays, we can apply for most financial products and services via the internet, and providers will accept digital signatures and scanned documents. Shouldn't this result in greater efficiency and decreased costs?
Product charges
Product charges are a direct consequence of fees and commissions; ethical advisers will disclose everything to help you decide whether to proceed or not.
This is the point where things can become a little murky. There are two main charge types:
- front-end-loaded.
- and back-end-loaded.
Essentially, fees can be either paid as a pre-agreed amount, which is often a percentage of funds invested (front end) or spread over a set timeframe (back end). Most reputable companies offer both and a banded table of fees whereby the more you invest, the lower the percentage fee.
Back-end-loaded structures make the actual percentage being paid to the adviser harder to identify. However, these structures offer 100% invested on day one and may be the best route for long-term investors. Importantly, back-end charge structures also contain exit fees if you withdraw from the investment within a set period of time. This can be anything up to 10 years. Of course, if you invest for a longer period than where exit fees apply, this isn't a problem. Additionally, more of your money is invested on day one; this could perhaps result in a higher portfolio value, particularly in the early years.
Annual advisory fees
Most advisers charge annual advisory fees. Again, this must be fully disclosed and understood before investing. This fee should be seen as a positive. There is little to motivate your adviser to work on your behalf after the initial sale without an annual fee that covers service, administration, and investment management. Do examine this fee and the services promised, though. Annual advisory charges vary according to the company you deal with.
Fund management charges
All investment managers are obliged to quote the fees for managing their funds. Beware of acronyms! The only ones that matter are the Total Expense Ratio (TER) and Ongoing Charges Figure (OCF). These fees are essentially the same and, importantly, often very different from Annual Management Charges (AMCs).
AMCs don't consider the extra costs of running a fund, which can only be found buried deep in the official prospectus. These additional charges can significantly increase the actual cost of investing. TERs and OCFs illustrate the real cost of investing in a fund. Avoid any that don’t automatically quote TERs/OCFs on their 'fact sheets'.
For example, if fund A quotes an AMC of 1.75% per annum, which actually equates to an OCF of 2.50% (not uncommon!), and fund B has an OCF of 0.50% p.a., the first fund is going to have to outperform the second by 2% p.a., assuming they both invest in the same sector. Not impossible, but highly unlikely.
Below is a pension fees and charges checklist for consideration:
Checklist
- Understand the charging structure and whether there are exit fees
- Ask your adviser how much commission the deal will generate for the company
- Any additional commissions related to particular fund recommendations?
- Be sceptical when being recommended to invest in a company’s own fund
- Be aware of and quantify any annual administration fees
- Always request TER/OCF numbers for funds
- Seek value for money as well as low costs
- Last, if you aren't happy with the answers you receive, walk away.
If you would like further information on pension fees and charges, please complete the form below: