Yellowtail Blog

From time to time we take on a client who has (in our opinion) received bad advice warranting a formal complaint against the former adviser. The following tale describes one of those cases which we had to take to the Financial Ombudsman Service who finally found in our client’s favour, though not without more than a year spent working against a particularly intransient former adviser.

For a long time our client had been taking advice from an adviser belonging to a network of advisers called Openwork - this is a firm in which Zurich have a large financial interest and which is essentially a multi-tied version of the old Allied Dunbar group of advisers (multi-tied means that they sell products from a limited range of companies though this is not the same as being independent).

Virtually all the client’s pensions and investments were tied up in Zurich Life products and for a variety of reasons the client felt he wanted to diversify away beginnng with his pension. Not wanting another Zurich pension he was introduced to someone from Zurich Independant Wealth Management to provide an alternative.

Following a series of meetings in 2005 (held jointly with both advisers, the tied and the independent together) it was finally suggested in February 2006 that the client transfer his entire pension into a new Norwich Union contract, though at the time the client raised questions about the inheritance tax position of the pension fund.

The transfer to Norwich Union went ahead and between them the two advisers shared more than £9,000 commission - more on this later.

Then in March, in a flurry of activity before the changes to pension legislation a new recommendation was made, this time to transfer the pension from Norwich Union to an offshore pension provider called London & Colonial who had a particular “open annuity” and “protected cell” structure to make the inheritance tax position better.

So, in less than 6 weeks the pension fund was transferred again, this time to London & Colonial. However it did mean that the advisers this time shared commission of more than £23,000 - because of another product they inserted into the mix, this time a Clerical Medical Offshore Investment Bond, and it was this product that paid the commission (and landing the client with yet another tier of charges).

The transfer to Norwich Union was clearly unnecessary from the client’s perspective, but let’s not forget that it did net Zurich and the advisers more than £9,000 of commission. You would think that as the money was transferred away from Norwich Union so soon they would have applied a penalty or recovered the commission, but surprisingly they didn’t. The client therefore suffered no loss over this transfer, but surely Norwich Union’s shareholders and policyholders did?

The new London & Colonial contract appears to meet the client’s needs, but we wondered why the offshore bond was included as it only served to increase charges and pay commission. Zurich and its advisers continually defended their actions and the level of commission received - in all more than £32,000 - an eye-watering amount by anyone’s standards and approximately 8% of the pension gone in commission!

The Ombudsman handling the case agreed with us and suggested that the original commission of c£9,000 was an adequate reward for the advice to transfer the pension from Zurich to London & Colonial. The Norwich Union contract, although causing the client no financial loss, was unnecessary. The Clerical Medical Bond was also unnecessary. The Ombudsman therefore ordered Zurich to undo the underling Clerical Medical Offshore Bond, along with it’s associated commission and charges, and make a payment into the London & Colonial pension as if the Clerical Medical Bond had not existed - I calculate that this comes to more than £23,000 mainly to cover commission payments as well as Clerical Medical’s own fees and charges.

This is a shocking case, not least because it looks as though the advisers abused their position of trust for their own material gain, motivated by a double helping of commission.

One client, one pension, two advisers, and four insurance companies sounds like too many fingers in the pie, with the advisers picking some particularly juicy plums!

In one of the trade papers Clerical Medical comes under fire for axing trail commission, briefly, a story about Clerical Medical ceasing to pay the ongoing trail commission to advisers that no longer provide a service (I cover trail commission in another blog article called what is commission). Anyone that knows me will understand that I am unlikely to get upset about this decision from Clerical Medical, however after some discussion with them earlier this year this does come as a bit of a smack in the face.  

Why? Well earlier this year we asked Clerical Medical to stop paying trail commission on our clients policies and pension plans. Because of our 100% fee only model, commission, whether paid at the outset or ongoing, was no longer part of our charging regime. We can stop trail commission said Clerical Medical. So to clarify things we asked exactly how our clients charges would reduce. Our thinking was; if part of the annual management charge is simply paid to us, then surely if we no longer received it their would be a corresponding reduction in the level of charges. 

Er, no! Clerical Medical were going to keep it.

A conundrum, what should we do? In the end we found the clients a cheaper product, one paying no commission, and we arranged to switch the contracts free of charge. What a waste of time and effort, and a display of greed from Clerical Medical - an accusation from other advisers following this current action.

Returning to the article; I am dismayed by some of the comments from advisers hitting out at Clerical Medical. One adviser, who shall remain nameless said the following  “The client they have removed my trail from has not done business with me for years but if they asked for advice on financial planning, I would provide it. Will Clerical do that? Will they offer fair, unbiased advice on their with-profits fund, for example, if the situation comes about?”

Morally what right does this adviser have to continue taking money from someone who no longer appears to have a relationship for advice? And why are clients still in the Clerical Medical With Profits Fund? They’ve been taking the trail commission yet not giving advice on a defunct fund. Ignoring a fund that has returned virtually nothing throughout the raging bull markets post 2003 is an admission of abject failure. And that’s what’s wrong with commission!

I cannot get over the sheer number and complexity of the charges available under the AXA Estate Planning Bond that I wrote about recently. How can anything that is meant to be so simple end up as complicated as it is?

This is a financial product that has charging options A through to H (seven in all because option E is not available). The option offered to our client by her bank, Barclays, looked like this:-

Invest £200,000 and AXA will notionally inflate the investment value to £207,000 (how?), well this sounds good, clearly money for nothing. However, there is an establishment charge of 0.625% of the original investment each quarter over 5 years. Put like this it doesn’t sound much does it, and after all they’ve given an extra £7,000 to invest.

But hang on a minute, 0.625% each quarter, that’s 2.5% per year, or put another way £5,000 based on the original £200,000 investment. And then they take this for five years, which amounts to an establishment charge of, wait for it…£25,000. By now that £7,000 extra investment doesn’t sound quite so generous does it?

So, just to set up this bond AXA want to take a net £18,000 from which they’ll pay (in this particular case) Barclays £12,000. Nice work if you can get it. Add onto this the fund annual management charge of 0.5% per annum, that’s a further £1035 each year on the original £207,000 and then another quarterly administration charge of £17.50.

So having worked my way through this little lot, there’s only another six different combinations of charges to wade through. This is one product we’ll be staying well away from.

A client (a lady of over 80 years) recently sold a house and deposited rather a lot of money in her Barclays account. On her next visit to her branch she was approached by their financial adviser and she expressed concern about inheritance tax. He then explained how she could make a £200,000 gift into an insurance bond, thus reducing her estate by £200,000 whilst allowing her to retain the income. This sounded too good to be true, she was interested.

Following the meeting she received a large pack through the post with details of such a bond from AXA, the insurance company. Not understanding a thing the brochure was saying she finally called me for my opinion. I was scratching my head wondering how to immediately pass £200,000 out of the estate, give her access to the income, and be tax efficient from an inheritance tax position. Unable to come up with the answer I asked to see the documents.

OK, let’s cut to the chase here, it doesn’t work as described. The bond is a “Discounted Gift Scheme” and at her age if she were to make this £200,000 there would be a “discount” of slightly more than £72,000. In inheritance tax terms the saving would be nearly £30,000.

Leaving aside whether this would work or not I was struck by three things, the complexity of the charging structure, and the amount of commission that Barclays were going to take, and the effect of charges over the life of the investment.

Let’s deal with the commission first. Twelve Grand! So you walk into a branch, have a quick chat, perhaps followed by another quick chat, sign the paperwork and they sting you for £12,000! Is this simply daylight robbery? Compared to our charges it is.

Next, the charging structure. There are seven, yes seven different charging structures for this bond, none of which I could fully understand. It seemed to me however that our client would be faced with an “establishment charge of 0.625% of the original investment amount for each quarter over the first five years which amounts to a whopping 12.5% or one eighth of your investment wiped out in establishment charges, not to mention the ongoing annual management charges.

This doesn’t seem to be good inheritance tax planning to me, you’re either paying the government or you’re paying AXA and Barclays. With a bit of planning and some fee based advice we can achieve a better result at a fraction of the cost – result, less tax to pay and more money in the hands of the beneficiaries.