Why it pays to cut out the middle man

Last updated: Aug 23rd, 2011
Feature by Helen Pridham

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.

Annuities

If you have a personal pension, or additional voluntary contributions (AVCs), it is vital to shop around at retirement for the best annuity as doing so could boost your pension income by up to 30%.

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.

If you would rather shop around yourself, one source of information is the comparative annuity tables published by the Financial Services Authority.

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.

Funds

Buying funds direct from a fund manager will not save you any money, as you will still have to pay the initial and annual charges, which include an allowance for commission.

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.

General insurance

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.

Investment trusts

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.

ISAs

Cutting out the middle man when investing in an ISA is relatively easy. You can find out the best rates for cash ISAs in Moneywise's pick of the best deals.

Or - if you buy funds with your stocks and shares ISA allowance - the best ways to buy are the same as when you buy funds direct, as ISA charges are identical.

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.

Life insurance

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.
 
Pensions

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

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