Let the Isa buyer beware advisers on commission

Let the Isa buyer beware advisers on commission

A disturbing trend has developed this Isa season, with a growing number of fund managers attempting to attract attention by resorting to dangling the carrot of higher commission in front of the financial advisers who sell their funds.

Traditionally, advisers have received a standard 3 per cent initial commission and 0.5 per cent annual or 'trail' commission on investment funds. Unlike insurance products, such as investment bonds, where commissions can be anywhere between 4 and 8 per cent and companies often vie with each other to offer advisers the best deal, fund managers have been less prone to 'buying' business.

But there now are signs that commission rates are being bid upwards, notably on multi-manager funds. Schroders, for instance, is offering advisers 5 per cent up-front remuneration on its multi-manager funds.

A more worrying trend appears to have been started by HSBC when it launched a range of multi-asset fund-of-funds last November. It offered advisers the option of taking extra trail commission of 0.75 per cent per annum, rather than the usual 0.5 per cent. This will push up the total expense ratios on its funds from 2.25 per cent to about 2.5 per cent.

Meanwhile, T Bailey also announced at the end of last year that it would increase its annual management charges from 1.25 per cent to 1.5 per cent and its trail commission to advisers to 0.75 per cent.

One reason for these increases is the growing number of multi-manager.....continued below

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funds and the difficulty the managers now have in offering something distinctive.

But it is not only fund-of-funds managers that are entering the commission bidding war. Jupiter has also announced it will pay higher initial commissions of up to 4.25 per cent on its funds until 30 April.

Higher front-end commissions are not necessarily bad for investors, says Justin Modray of independent financial advisers Bestinvest, which offers discounts on initial fund charges to investors who make their own investment choices.

'Higher initial commissions don't affect the amount the investor pays,' he says. 'It just means the manager keeps less of the 5 per cent initial charge.

'However, it may cause a potential bias if the investor seeks advice. Most advisers are still remunerated by commission, so they might be tempted to recommend funds that are not necessarily in the best interests of the client. If a fund is good it should sell on its own merits - managers should not need to pay advisers more.'

Potentially more damaging for investors are enhanced annual commissions. Modray says: 'These will come out of clients' pockets because they will have to pay higher annual charges, so it could damage their returns in the long run.'

But Paul Ilott of Bates Investment Services says even higher annual charges may not be a bad thing. 'Our research has revealed there is no correlation between high charges and poor performance.' He is not against multi-manager funds either. 'At least it means inactive investors don't get stuck for years in an underperforming single manager fund.'

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