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Has RDR made Protected Plans more expensive?

Investment | Specialist Helpful? 3

Asked by STANBEHRMAN, submitted 18 May 2013.

Open Quote I wish to discuss with you and your readers an issue that has developed since the start of this year after the RDR was brought in.

I always purchase funds and investments using Execution only, without advice. I am now being forced to use a financial adviser and pay fees, even though I do not want to.

Previously I was able to buy structured funds (kick out plans), and choose to pay no fee and get 1% cashback through one broker (Lowes) or, alternatively, I could pay a small fee and receive 3% cashback through another discount broker (Cavendish). (I chose the latter). Now, not only do I not get any cashback, but I am also forced to pay a fee to a broker or financial adviser, even though my investment is Execution only.

I have phoned a couple of fund providers and they will not accept applications direct.

The fund providers who previously paid 3% commission to the brokers are not having to do so now. They have not increased their benefits to the investors, and are therefore just pocketing the money. Previously, with these type of investments, the charges were already built in. Consumers are now being forced to buy structured products or similar investment funds through a financial adviser and pay a fee, but the potential interest or gain on products has not been increased by the fund providers to offset the 3% commission that they do not have to pay out to brokers.

How is the consumer is supposed to be better off after RDR in the above circumstances? Is there any action that I can take to make sure that I do not suffer financially by being forced to pay a fee when previously I did not have to do so? Can the FCA force the providers to accept Execution only customers who do not want to go through a financial adviser? Do you know of any discount brokers who charge a very nominal fee? Cavendish charge £35 but now give no cashback, which used to be 3% of the sum invested.

I look forward to your reply and thank you for your assistance in this matter.
End Quote

Answered by Justin on 28 June 2013

Having just checked a few structured (protected) product providers you're quite right, they no longer bother with commission paying versions of their plans. I'm guessing the proportion sold via execution only brokers was small, so it's not worth their while bothering with this.

So where a product did previously pay commission of, say, 3% initially this 3% is now being used to provide slightly better product terms (i.e. it's another 3% that can be used towards buying market exposure/protection in one way or another). Providers suggest this is the case and we've no practical way of knowing otherwise.

The trouble is, the current crop of protected products are suffering from a double whammy of reasonably calm stock markets and low interest rates. Calmer markets increases the cost of buying market exposure and low interest rates (specifically, credit default swap rates) means the providers have to set more money aside at outset to provide for the protection at maturity. So less money is available to buy market exposure, which itself has gone up in price.

The recent stock market volatility might help improve the terms on offer, but this probably won't filter through until the next batch of protected plans come onto the market in the next month or two.

So in theory the bottom line has not changed. The commission that would have been rebated is now used to improve terms and you still pay an admin fee to Cavendish Online. This isn't obvious given the cost to providers when building these products has increased of late, so unfortunate timing in that respect. But I am inclined to believe them when they say they're not simply pocketing the commission themselves.


Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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