One way in which they differ is whether they rebate annual trail commission from underlying funds within offshore bonds to the policyholder.Norwich Union Internat ional has just joined a small group of insurers that pass on the rebate from external funds within offshore bonds. Others include Axa Isle of Man, Clerical Medical International and Scottish Equitable International. Advisers receive annual trail commission from offshore bonds. The underlying third-party funds also pay trail commission which is typically 0.5 per cent a year. The commission from the underlying fund is paid to the life company rather than the adviser. Most life companies have traditionally retained the trail commission from the underlying funds. Some have argued it is difficult from an administration point of view to pass this commission on to each policyholder. One offshore insurer says: “The commission is paid every quarter by each asset manager in one bulk for all policyholders. It is not paid separately for the different policyholders. The insurer then has to verify which policyholders hold that fund, how much they have invested and for how long before they can calculate the rebate. “These calculations can become complex, given that policyholders move into and out of funds during the quarter and are reducing and increasing their allocations on a regular basis.” Another insurer says establishing the systems to cope with passing on the trail commission can be expensive. “You have to ask whether the amount of trail commission to be passed on would compensate for this cost.” Some insurers do rebate the trail commission. They claim that they have the administration systems to establish how much is due to each policyholder. These insurers say the rebate is paid into policyholders’ cash accounts within their offshore bonds every quarter. It is then up to policyholders to decide if and when this money is reinvested in funds. The rebate should appear on policyholders’ state-ments. But advisers are warned that they should check the trail commission has been paid into their clients’ cash accounts. It is also recommended that advisers check the amount of trail commission before making investment decisions. The amount of trail commission payable should be available on the insurers’ websites or in their literature. CMI marketing manager Rod Macdonald says that passing on the rebate is part of insurers’ responsibility to increase their transparency. “If an insurer does not pass on the rebate, then it needs to disclose this to the policyholder. “Many advisers do not realise trail commission is paid by the asset manager. We are marketing the benefits of passing on the rebate to the reduction in yield for policyholders. It is only fair that investors receive the trail commission.” He argues that the administration of the rebate is not as difficult as suggested by some insurers. “It is similar to distributing dividends. Therefore, insurers should have the systems to offer this service.” Axa offshore marketing manager Christine Hall says: “We are asked why we can handle the trail rebate, where other insurers have not been able to do. It is difficult to answer as we have always had the systems to cope. They were designed to pass on the rebate to individual policyholders.” Macdonald says that without providing the rebate, the cost of offshore bonds increases by about 0.5 per cent a year for policyholders. There is disagreement over the effect of costs, however. It is argued that some insurers who pass on the rebate have higher charges on their bonds. Scottish Equitable International head of marketing Steven Whalley says advisers and investors need to check that in paying back the rebate, insurers do not raise other charges on their bonds. He says SEI started passing on the trail commission in March when it launched its wealth management portfolio. “For investors paying £1m and above into the bond, the annual charge on the bond is only 0.15 per cent. If the bond charges are higher than other insurers’ bonds, then the client will not receive the full benefit of the trail rebate.” Hall says advisers sometimes argue that offshore bonds from other providers are cheaper. “We explain they need to take account of the 0.5 per cent rebate we are paying into the bond that some other insurers do not provide. This affects the overall cost.” Norwich Union International recently announced it was to rebate trail commission on its premier portfolio bond. Marketing director Paul Sherlin admits it has raised other charges on the bond but added that the net effect has been to lower the overall cost. Sherlin says NUI’s systems calculate the value of the trail rebate on a daily basis. “Even though the rebate is only paid every quarter, it is easier to manage if we calculate it every day,” says Sherlin. “It did not cost us a lot to set up the system for passing on the rebate. “We have been asked to provide the rebate by a number of IFAs in the UK. Indeed, we had a couple of advisers that would not write business with us because NUI did not previously offer this service. The rebate benefits investors because it lowers the annual charge by 0.5 per cent or 0.7 per cent.” Sherlin adds that the level of rebate varies bet-ween funds. “Equity funds typically have higher trail commission than bond funds and therefore the rebate is higher.” These insurers believe that pressure will mount on other companies to pass on the trail rebate as well. “With the growth in the use of wraps and fund platforms, there is increased transparency in the industry which advisers and their clients are now expecting,” says Sherlin. Whalley argues that passing on the rebate provides insurers with a marketing edge over companies that do not. A related issue is the question of whether advisers receive the trail rebate rather than it going to the policyholder. Insurers all say they discourage IFAs from being paid this commission in addition to the commission they get paid on the offshore bond. They stress that if advisers are paid the trail commission from the underlying funds, they have to disclose this to their clients.
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