We are aware of at least one product provider who offers upfront discounted fees, plus further payments in years 6 and 11 of the plan. Whilst this option contains a number of positive innovations which will benefit clients, offering the carrot of upfront remuneration may not be seen by all as being in line with the spirit of the Retail Distribution Review.
In response to an enquiry, they provided us with the following rationale:
The advice fees are negotiable between the client and the intermediary. The intermediary can also negotiate a trail fee with the client and/or can negotiate a payment-based fee between 0% and 2.85% of each payment. To assist the intermediary, we will discount this payment-based fee over a 5-year period and pay it to the intermediary upfront. Importantly, the upfront fee is subject to a 5-year clawback. This has two implications:
- The client is completely unaffected by the discounting and the client is only charged for advice on the receipt of each payment. This is reinforced by the fact that there are absolutely no charges levied to the client on withdrawal or if the client stops making payments.
- The incentive to sell then churn plans is removed, as we will clawback the unvested commission once the client stops making payments.
One could argue that calling upfront remuneration “discounted fees” is merely a case of semantics. Many smaller IFAs are feeling the financial pinch resulting from increased costs of running their businesses. Is offering an adviser an upfront payment not really Hobson’s choice?
Another factor to consider is that, where a five year clawback applies, the adviser is the only party at risk in the case of early termination of the plan. As one adviser noted:
If a better option comes to market after a couple of years, the IFA has a Conflict of Interest in that the appropriate advice would be to place future premiums in this new product. Remember, there is zero penalty to the client to switch premiums to a new product, but the IFA will be penalised by the clawback for providing the correct advice. There is thus really only one loser.
