Why it pays to cut out the middle man
Many people remain deeply suspicious of financial advisers, who they fear will recommend high-commission, high-cost products rather than the best products. Helped by the internet, consumers are increasingly doing their own research and making their own decisions.
There can be cost savings with this DIY approach, but not seeking advice does not always mean you are cutting out the middle man. Brian Brown, head of research at financial data provider Defaqto, points out: "People often think, when they buy through price comparison sites, for example, that they are cutting out the middle man, but the sites themselves are just another type of middle man. They will get paid when you buy a policy through them."
In fact, dealing direct may not bring any savings - fund managers, for example. The most cost-efficient option often involves using an intermediary firm on an execution-only service, which means you make the decisions but they share any commission generated with you.
But there are some scenarios where a DIY-approach makes sense.
Using an adviser to help you find the best deal is normally preferable, but if your pension fund is relatively small, say under £30,000, many advisers won't even consider it unless you pay an extra fee to top up their commission payment.
Alternatively, online annuity services are offered by advisory companies Hargreaves Lansdown and Rockingham Retirement. Both will provide you with quotes. Once you have decided where to buy your annuity they will provide a free handling service regardless of the size of your fund.
The best way to save money is to buy funds from discount brokers or fund supermarkets, which will rebate all or part of the commission to you.
If you buy though Alliance Trust Savings Fund Supermarket, Hargreaves Lansdown's Vantage platform or Cavendish Online, you will normally pay no initial charges. They will also rebate part of the annual charge, which is the trail commission paid to advisers.
Hargreaves Lansdown provides a share of this commission through its loyalty bonus scheme and Alliance Trust Savings and Cavendish Online rebate commission payments in full. They make their money through fixed fees. Cavendish Online charges £10 a year, while Alliance Trust Savings has one-off buying and selling charges of between £12.50 and £20.
The easiest way to save money on general insurance is to use a price comparison website such as Moneywise's Compare & Buy service, or via moneysupermarket.com, gocompare.com or confused.com. But you may have to use more than one.
Research by consumer group Which? found the main sites did not provide the cheapest quote consistently and different websites gave different quotes for the same insurer. Also, insurers such as Direct Line and Aviva do not participate on price comparison sites.
When using a comparison site check the assumptions made and click through to the insurer's website to check the price.
You may be able to cut premiums by using a cashback site such as Quidco.com, cashbackkings.com or topcashback.co.uk.
Buying investment trusts direct is usually cheaper than going through an adviser or stockbroker. Several trust groups allow you to purchase shares free of charge, including Aberdeen, Asset Value Investors, Baillie Gifford, Fidelity, Investec and SVM.
If you want to put investment trusts in your ISA, it is a slightly different ball game. Most investment trust managers charge an extra annual fee for administering an ISA. Personal Assets and SVM are two exceptions.
One of the best ways of avoiding an annual ISA charge on investment trusts is to use the Alliance Trust Savings's self-select scheme, where all you pay is transaction costs.
Interactive Investor's portfolio builder offers free share dealing until 30 June 2010. Its real-time charges are £10 online or by phone and £15 for international shares.
Buying life and health insurance without a middle man is almost as easy as buying general insurance. For healthy under-40-year-olds, some of the cheapest term assurance premiums are quoted by M&S Money, the Post Office, Sainsbury's Finance and Tesco Personal Finance.
A cheaper option is to buy through discount broker Cavendish Online, which provides you with quotes. You pay a one-off fee of £35. The firm reinvests all the commission to reduce the premiums.
Moneyworld is another discount broker that works on the same basis, but only charges £25. It offers a telephone service for £30. Cavendish Online also sells income protection policies in the same way.
There is little to be gained from buying a personal or stakeholder pension direct. Again, it is by going through a discount broker that you will get the best cost savings. For a one-off fee of £35, Cavendish Online will arrange a pension and rebate all commission. This will bring down the annual charges on stakeholder plans by up to 0.45%.
If you prefer a self-invested personal pension (SIPP), taking a direct route can bring savings. Two of the cheapest plans available are the Hargreaves Lansdown Vantage Sipp and Alliance Trust Savings Select SIPP.
Both offer access to funds, investment trusts and shares, and will rebate all or part of the commission they receive on funds. For investors looking to hold investment trusts, shares or exchange traded funds, the Interactive Investor SIPP is one of the cheapest.
None of the companies charge a set-up fee and annual and dealing charges are modest.
When involving a middle man makes sense
Consulting an adviser can be worth it in the long run if your circumstances are in any way unusual or you are unsure about what you are doing.
When you are buying buildings or motor insurance, for example, if your house is of non-standard construction or you are trying to insure a young driver, an intermediary will make sure you get the right cover.
If you want life insurance and you are overweight or have a slight health problem, you could be rejected by a direct insurer, whereas a good adviser will know which companies are likely to treat you favourably.
When buying an annuity, you could miss out if you fail to inform the pension company of lifestyle or health matters that might affect your life expectancy.
When it comes to mortgages, you will rarely gain by not using a mortgage adviser who is up-to-date with what is available in the market and will make no extra charge for finding you the best deal.
On the pension and investment front, going direct can reduce your charges, but you will need to be confident that you are making the right decision. A wrong choice could prove expensive in the long run. And if you buy the wrong product or make a bad investment yourself you won’t be able to sue anyone or claim compensation from the Financial Ombudsman Service.
A DIY approach can work, says Robert Reid, managing director of independent financial advisers Syndaxi and a past president of the Personal Finance Society, but only if you know what you are doing.
"You need to consider the worst case scenario if you get it wrong," he suggests. "If it is a matter of losing a few hundred pounds on a dud investment or bad motor insurance policy, it may not be too serious. But if it means you could end up with a lower retirement income, is it a risk worth taking?"
This article was originally published in Money Observer - Moneywise's sister publication - in December 2009
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Term assurance provides cover for a fixed term with the sum assured payable only on death. Term assurance premiums are based primarily on the age and health of the life assured, the sum assured and the policy term. The older the life assured or the longer the policy term, the higher the premium will generally be. There are generally two types of term assurance. Level term assurance premiums are fixed for the duration of the insurance term and a payment will only be made if a death occurs during the insurance period and with decreasing term assurance, life cover decreases during the insurance term reducing the cash payout the longer the term runs and this is reflected in the premium.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
Describes the relationship between a client and a stockbroker or independent financial adviser whereby the broker or adviser acts solely on the client’s instructions and doesn’t offer any advice on which shares to invest in or financial products to buy and simply “executes” the wishes of the client, regardless if they are judged to be sound or wrong. Other types of broking service offered are advisory (whereby the client/investor makes the final decisions, but the broker offers advice) and discretionary (whereby the broker manages the portfolio entirely and makes all the decisions on behalf of the client).
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Additional voluntary contributions
If you’re a member of an occupational pension scheme but want to increase your contributions to help boost your income in retirement, this is where AVCs come in. An AVC is a top-up pension that sits alongside your company pension and is administered by your employer. You get tax relief on your contributions and, if you move jobs, you can apply to transfer your AVC plan to your new employer or your AVC your contributions have to stop with your old employer and you will need to start a new AVC plan with your new employer. An AVC linked to a company scheme is subject to the rules of the main pension. (See Free-standing additional voluntary contribution).
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.