The most sensible thing to do when you set out to buy any financial product is to get independent advice. You will not get independent advice by going to a tied agent of an insurance company, a bank that also has its own life assurance company or An Post or a credit union, since they all have an interest in you buying their product.
An experienced, fee-based adviser is the ideal choice, but they are rare because few conventional commission-based brokers, no matter how much they want to, can afford to switch all their business from commission-paid to fee-paid. Why? Because not enough clients are prepared to pay them a fair, up-front fee, although they will pay fees to solicitors, doctors, dentists and accountants.
The result is twofold: consumer confidence in investment companies and their intermediaries remains shaky because of the awareness that commission might be influencing the sale, and genuine brokers who would like to offer the service to increase their credibility and that of their industry continue to struggle with the fee side of their business and end up taking commissions (though often partly refunding them back to the customer).
REA Mortgage Services is a fee-based mortgage brokerage that set up three years ago to specifically challenge the way mortgages were being arranged and to refund the substantial commissions and finders' fees being paid by lenders and life companies to mortgage brokers.
It has now introduced a life and pensions broking service - the REA 50/50 Refund - which will also refund commissions payable on the sale of life assurance, pensions and savings/investments. Headed by Richard Eberle, an US consultant who worked in the commercial mortgage sector in Washington DC before moving to Dublin with his family in the early 1990s, REA offers a mortgage package that includes the best value loan, conveyancing and related mortgage protection policies for a flat fee. In the past six months, it claims to have refunded more than £70,000 in commissions to its clients who pay a flat £995 for their HomeBuyer Package on loans up to £200,000. Above that value and the fee jumps to £1,195. In both cases the clients can usually expect a refund from both the lender's commission (usually 1 to 1.5 per cent of the loan) and/or any commission payable on a mortgage protection policy.
Getting someone to pay a flat fee for a mortgage package that includes a comparison of all the lenders, a cheap conveyancing service and the arrangement of any mortgage protection and other insurance - and the disclosure and refund of any commission - has been successful, says Mr Eberle. Getting the same clients to pay a fee up-front for a nil-commission protection or investment policy (where there is no refund) is another matter.
"The problem is that people are simply not prepared to pay for good life and pensions advice when they perceive that they can get it for free down the road." Despite the Government's long-standing intention to require full disclosure of all commission and charges, the actual legislation has not yet been passed. The average person buying such products is still not aware that they are paying for the intermediaries' advice and recommendation through a sizeable commission that will be paid either out of the first year's premiums or spread out over a number of years. Since no up-front cheque has to be written, the myth of "free advice" is perpetuated.
"We decided there had to be a new way to approach this and we looked at how discount broking operates in the States and to a lesser degree in the UK," Mr Eberle explains. "We've designed the REA 50/50 Refund so that it is commission-based but so that we can also provide good advice, disclose all the charges and make the product as transparent as possible. We refund 50 per cent of the commission on the full range of products.
"In a perfect world everyone would pay a fee for totally unbiased advice, but our experience is that they are not prepared to do so."
The new service will sell life insurance policies, critical illness and permanent health insurance, pensions, savings and investment policies and tracker bonds from 80 per cent of the companies on the market. Unfortunately they will not be selling products from the two bank assurers, Ark and Lifetime, nor from Equitable Life or An Post, since none of them award agencies or pay commission to outside intermediaries.
There are two basic services: for the person who knows what commission-paid product and company they wish to buy from, REA will execute the policy and refund half the commission. A term life policy, with annual premiums of £500, for example, carries a 90 per cent commission worth £450.
REA will pay back £225 as its refund. A conventional pension plan in which charges are paid up-front out of the first year's premium pays out half the premium in commission. If, for example, someone contributed £200 a month or £2,400 a year, under the REA scheme the broker would receive £600 (half the £1,200 commission) and the client £600, plus half the annual renewal commission of 4 per cent. Commissions would be similarly disclosed and divided for PIPS and PEPS, tracker bonds or savings bonds.
The second service is for people who are not sure what kind of pension or savings plan they need. For a flat fee of £50 plus the refunded commission, REA will try to match the customer (taking into account his or her level of risk, age and income, career expectations) with a suitable product on the market.
All products will have been vetted and selected using a basic set of criteria based on fund performance, asset mix, value for money, reliability and level of service. As a discount broking operation, Mr Eberle forsees most business being done over the telephone, though clients can come to its office. Every customer will also be given a free copy of a detailed new investment booklet, How Money Works which explains in simple language the way in which different investment funds operate and the pitfalls that can befall them.
"We can offer a fee-based service to those clients who appreciate and understand the merits of arranging pensions and investment policies, in particular, on a nil-commission basis," he says, "and we hope next year to also offer a full financial planning service, perhaps paid on a fee/commission set-up. But that is further down the road."
A service like this, from a company with a record of refunding commissions and offering full disclosure and a fully transparent service itself, will not be welcomed by the intermediary community which is either directly linked to one or a few companies or by the brokers who have agencies with most of them and take full commission. As a discount broker, REA will not be offering the level of service that fee-based ones do or the best of the commission-paid brokers who give a personalised service complete with annual reviews. But it is offering a service that is transparent, has been well organised in terms of product vetting and choice and is cheaper. Anyone considering its service is best advised to check out the bank assurance, An Post and Equitable Life products as well, before making any final choice.
REA Mortgage Services can be reached at (01) 676 1595; Fax: (01) 662 7102 and by email: mortgages@rea.ie; website: www.rea.ie
