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Charge of the 1% brigade

Since the Government began to meddle in product design with Catmarked Isas and the imminent arrival of stakeholder pensions, it has been derided for interfering in issues in which it does not understand. The industry has consistently claimed that it is best placed to deliver appropriately priced products to its audience. However, it is an argument that is becoming increasingly difficult to swallow.

After all, since the first moves to introduce capping on product charges almost every product in the market has begun to fall into line. Why is the industry now suddenly able to slash charges across the board on life, pensions and investment products?

It is impossible to believe that these cost reductions were planned or that they have resulted in massive improvements in efficiency.

The reality is that for years consumers have been overcharged by life offices and fund management groups seeking to make profit at the expense of an uninformed public.

What has also occurred is that product providers (and IFAs) have begun to reappraise the way they operate and have started to develop their businesses in a way they should have been doing for the last 20 years. This has been forced on them by more than just Government initiatives. Having seen what happened to the general insurers following the launch of operations such as Direct Line, it was not difficult to envisage the demise of many of the current industry heavyweights had they chosen to stand still.

There are also other forces at work. New information channels such as the internet and digital television are arming consumers with greater knowledge and they are therefore less likely to be duped into buying an overly expensive product.

I read an IFA comment recently that the 1 per cent charge was fine for pension contracts but not for investment. Why? Given that a pension is simply an investment held within a tax-efficient wrapper it is impossible to understand the sentiment.

I also read a claim that by sacrificing commission, some personal pension contracts can be more costeffective than stakeholder. So what? Great! If it is possible to do this now why has it not been possible in the past? Why did it require the introduction of stakeholder to bring the market into line? Such a claim does not mean that the traditional heavily loaded personal pension with full commission was a good product.

While it could be argued that the cap at 1 per cent is too low and that a higher level should have been chosen, this is not really supported by the evidence. Those who claim that the traditional costs are essential to provide appropriate levels of service and advice are missing the point.

The reality is that the majority of retail investments end up in a middle-of-the-road managed fund or a with-profits fund. Over practically any period you care to compare, these have underperformed tracker funds that are now available from as little as 0.3 per cent each year. Where is the added value? How can it be argued that traditional margins are required when the traditional solutions have underperformed for years? The average life managed fund has struggled to beat the returns from cash over the last 20 years.

I am not for one second advocating that tracker funds are appropriate for all investors but am merely suggesting that for the mass market it is possible to provide a balanced investment portfolio of cash, bonds and equities for less than 1 per cent a year. At the higher end of the market, where more specialist skills are required and the risk/reward profile of investors is entirely different, it is probably appropriate to charge more than 1 per cent.

So, while the principle of a capped charge is something that should not have been required, it has nevertheless resulted in a situation where the industry is finally beginning to get its act together – areas of value are being identified and investors are generally receiving a better deal.

While this has inevitably resulted in some casualties and will result in more yet, it will have the positive effect that there will be more satisfied customers and the sickeningly poor reputation of the industry may begin to improve. If that is not good news in the long term then I am not sure what is.


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