March 12, 2024
When it comes to getting value for money how do you the consumer gauge what value for money is?
It seems obvious although different people will have different views on what value means to them. If you were go to a restaurant and get poor service and the price or bill is expensive then you can gauge quite quickly based on previous experiences on eating out that your experience on that occasion was poor value for money. In this example you know instantly. But how do you gauge getting value for money when it comes to engaging with the financial services industry?
Some History
Well to understand that we must go back in time. A few years ago around 1997 the government and the regulator decided it was time for the financial services industry to disclose the true impact commission had on being paid to firms for selling financial products. It was called Hard Disclosure. Here an example of what a Hard Disclosure form looked like taken from a real quote back then at point of sale. This example shown below illustrates that the cost of deductions could amount to £17,700 based on a £60.00pm savings plan.
An example of a key features document
If you cash in during the early years you could get back less than you have paid in. The last two columns assume that investments will grow at 7.5% each year.
| At end of year | Total paid in to date | Total actual deductions to date | Effect of deductions to date | What you might get back |
|---|---|---|---|---|
| 1 | £720 | £607 | £607 | £141 |
| 2 | £1440 | £968 | £1010 | £540 |
| 3 | £2160 | £1090 | £1210 | £1200 |
| 4 | £2880 | £1230 | £1440 | £1900 |
| 5 | £3600 | £1380 | £1700 | £2640 |
| The later years | ||||
| 10 | £7200 | £2200 | £3390 | £7190 |
| 15 | £10800 | £3340 | £6180 | £13300 |
| 20 | £14400 | £4890 | £10600 | £21700 |
| 25 | £18000 | £7010 | £17700 | £33100 |
What are the deductions for?
The deductions include the cost of life cover, commissions, expenses, charges and any surrender penalties and other adjustments. The last line in the table shows that over the full term of the policy. The effect of the total deductions could amount to £17,700. Putting it another way, leaving out the cost of life cover, this would have the same effect as bringing investment growth down from 7.5% a year to 5.9% a year. Source: Financial Services Authority ( FSA) You will hopefully note having taken £17,700 out of your plan to fund commissions and charges etc you might start to understand, or question is this value for money?
The past and the present
Despite Hard Disclosure it didn’t slow anything down but there was always this nagging doubt whilst commissions were being paid how financial firms would not be influenced by large amounts of commissions being paid on certain products. So, the Government and the regulator decided to change things again and Ban commission on the sale of financial products – selling Pensions and Investments in particular. This was known a RDR – Retail Distribution Review and was introduced in 2013. It was supposed to separate any remuneration paid to financial firms from the product thus making product recommendations more open and transparent. However at the last minute RDR decided to allow fees which firms could charge separate from the product recommendation to be allowed to be taken from the product being recommended – Pensions and Investments in particular.
What did this mean? In simple terms commissions was now rebadged and called fees. RDR changed nothing – in fact fees being taken out of your product are now worse in terms of how Commission charges under Hard Disclosure took money away from your Pension or Investments.
In a recent discussion on Radio 4 Moneybox the true impact of the present system of how charges are applied compounded over typically 25yrs on a Pension Fund building up would equate in total deductions approaching 25% of the fund value.
The future
So, what can you do about it – is there an alternative especially now in this cost of living crises.
We switch our car insurance to save a few hundred pounds.
We hunt for lower energy prices by switching providers.
We change our shopping habits to seek out value for money.
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