Commission creep: an example from our postbag
‘Here’s a genuine reward, with not a serpent in sight’, read the blurb. We rarely single out individual firms as it can detract from the generality of an idea. Yesterday’s post to No Monkey Business (as a potential business introducer) included an example of commission bias at work but since it claims to be a response to demands from the IFA community, it does itself claim to make a general point.
The offer was from T Bailey Asset Management, a manager of managers – ie two sets of charges. Their top-layer charge is being increased from 1.25% to 1.5% to provide a trail commission to introducing IFAs of 0.75% – ‘that’s 50% more commission for you’. This is in addition to paying introducers up to 3% initial commission (out of 5% the customer pays). How they present themselves to the public can be seen at their website: www.tbailey.co.uk.
The total expenses of their underlying funds bought this way are shown ranging from 2.1% for the lowest risk offering to 2.44% for an all-equity fund. As a percentage of the normal expected ‘risk premium’ in real terms, the lower risk cost wedge (on the worst terms for the customer but amortising the full initial charge generously over 10 years) is near enough 100%: you take the risk, the industry takes the risk premium. The highest risk product carries a cost wedge of 3% or (assuming a 6% pa real return and 2% pa real risk free rate) 75% of the expected risk premium. We ask the FSA: how are these costs compatible with Treating Customers Fairly?