If you received financial advice or used an intermediary to buy an investment product before 31 December 2012, you may be paying trail commission. See three ways to stop paying it.
Trail commission was an annual fee paid to financial advisers by their customers over the lifetime of products such as pensions, with-profits bonds and unit trusts.
It was also paid to intermediaries, such as discount brokers and fund platforms, that recommended or enabled the purchase of funds or other investments.
Trail commission was a percentage fee, typically 0.5%, taken out of the sum of your investment each year. It was usually included in the annual management charge, so it was not always clear that you were paying it or how much it cost you.
The trail commission may have been intended to cover an ongoing service, but was often paid to advisers each year without them reviewing their customers’ investments or providing further advice.
Financial advice changes
Advisers cannot receive commission – including trail commission – on new investment products bought after 31 December 2012.
Your adviser now has to clearly explain how much advice will cost and together you will agree how you will pay for it. You can see more on paying for financial advice.
As a result, we expect products that did not include trail commission before our changes came in – such as tracker funds, investment trusts and exchange-traded funds – to be recommended by advisers more often.
However, a financial adviser or intermediary can continue to receive trail commission for advice on investments that you bought before 31 December 2012.
Tackling trail commission
There are ways to stop or reduce the amount of trail commission you are paying on investments you bought before our changes took effect. Some of these include:
Sell your investment
A guaranteed way to stop paying trail commission is to sell the investment.
However, you should check whether there are any penalties attached to selling it and consider getting professional advice, such as from a tax expert.
You could then buy the same or a similar product which, because you are buying it after our changes came in, will not include trail commission.
But find out what it will cost for your adviser or an intermediary to arrange the new investment and think about what sort of advice you might want in the future to ensure it is worth it.
Ask for a better service
If you feel you have not received an appropriate service as part of the trail commission, such as ongoing advice or an annual review, ask if your adviser will provide it in the future.
If your adviser will not add more to their service, you might consider finding another one. See how to find a financial adviser.
However, even if you move to a new adviser your original one will continue to receive trail commission for the investment they recommended or arranged for you. You can arrange to have the trail commission re-registered to your new adviser, and they will have to provide an ongoing service to receive that commission.
Claim the commission
Many advisers and intermediaries rebate some or all of the trail commission you are paying on an investment. This means you could claim some or all of the trail commission for yourself, usually in return for paying a transaction fee, annual charge or both.
The amount advisers, discount brokers and fund platforms will return to you can vary, so it pays to shop around.
When adviser commission can continue
There are some products that can still see you paying commission (and trail commission) to your adviser or an intermediary.
These include life insurance products like investment bonds and with-profits bonds, where switching funds within a policy on the recommendation of an adviser does not end trail commission. However, if you are advised to invest more money in the product you will pay an agreed fee rather than commission on that sum.
The ban on commission also does not apply to insurance policies, such as for your car or home, protection products like critical illness and income protection or mortgages and equity release products.
If your adviser recommends a product that still involves you paying commission, ask about the cost and why it is the most suitable product for you rather than one that has a fixed cost.
You can also ask if your adviser will accept an agreed fee rather than being paid by commission, and whether they will rebate the commission to you.
Intermediaries, such as discount brokers and fund platforms, may still receive commission (and trail commission) where they only provide investment information and execute the purchase of a product, rather than providing personalised advice or a specific recommendation.