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Bond and deliver

Adviser-charging will have a big impact on the bond sector, says Aegon director for unit-linked guarantees Colin Bell, but prepare well and clients can continue to enjoy the benefit of these smart investments

There has been a lot of comment on the changes the RDR will bring to the industry and how advisers can best prepare for them. You have followed the advice and segmented your client bank, finalised your operating model and passed all the necessary exams – so what next?

The key to any sustainable business model is to manage cashflow and ensure you receive payment in a timely manner from your customers.

The two most common payment methods for financial advisers after the RDR will be direct from your client or the product provider facilitating the payment.

The product provider can help facilitate an adviser charge where an instruction has been completed, which captures the client’s agreement to the adviser charges where they are to be facilitated from the investment.

Many commentators have looked at what this will mean for pensions but there are implications for investment solutions such as bonds.

One thing is clear, there will not be one rule you can apply across your entire client base. You will need to consider whether your client is a higher or basic-rate taxpayer, whether they are investing for capital growth or income, the type of product and what impact the adviser charge will have on future performance.

The following example illustrates some of the main considerations. After a review of David’s financial position, his adviser, Margaret, has identified that £150,000 should be invested in an offshore bond.

Margaret has been able to demonstrate added value in identifying the inheritance tax saving and trust-planning opportunities for David and has agreed an initial fee of £3,500 with a fee of 0.5 per cent of premium for ongoing advice.

Margaret has two options to collect her initial fee, to invoice David directly for her services or to agree with David how the fee can be settled through the investment by completing and agreeing an adviser- charge instruction.

If Margaret invoices David directly, this will have no impact on the offshore bond but what would happen if David and Margaret complete the adviser- charge instruction?
Table 1 shows the position for David with the initial adviser charge facilitated by the offshore bond provider.

In both examples, David would have written a cheque for £150,000. However, the adviser charge instruction would instruct the product provider as to whether the payment to Margaret is to be taken inside or outside the bond wrapper.

When the initial adviser charge is taken outside of the bond, this reduces David’s 5 per cent tax-deferred allowance for all future years.

This would provide the same result if the initial adviser charge was taken as a segment surrender on day one. However, if the charge is taken inside the bond wrapper across all segments, the 5 per cent tax-deferred allowance is higher, although it is reduced in the first year by the amount of Margaret’s fee, which is treated as a withdrawal.
Table 2 illustrates the ongoing adviser charge. The example has been based on a percentage of premium, although, depending on the provider, it may be possible for this to be a fixed amount or based on fund value.

Any ongoing adviser charge taken across all segments will be treated as a withdrawal from the bond and again reduces the client’s 5 per cent tax-deferred allowance.

A further type of withdrawal the bond could facilitate would be an ad hoc adviser charge for any one-off services. This could be taken as a withdrawal across the segments, reducing the policyholder’s 5 per cent allowance, or alternatively as a segment surrender.

This would have to be agreed with the client and care would need to be taken to consider the tax implications.

The bond remains a product that will enable advisers to demonstrate their worth to clients. From IHT planning to internationally mobile clients, the bond will continue to offer the many benefits enjoyed today. However, the operation of adviser-charging will mean the adviser and client will need to carefully consider the implications of different ways of paying for financial expertise.


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