RegulationMay 28 2013

Adviser charging: Handling investment bonds under trust

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Like it or not, the changes introduced by the RDR have now been implemented. We all therefore have to get used to a world where commission can no longer be paid in respect of advised sales of investment bonds.

Instead, advisers need to make charges, both initial and ongoing. But how can these be collected where the investment bond has been taken out under trust?

Looking first at the initial adviser charge, we have to consider who is receiving the advice and, hence, who is responsible for paying it. In most cases the initial advice will be given to the client.

It will therefore be the client who will pay the initial adviser charge, either as a separate remittance to the amount being invested or via the provider-facilitated alternative. This allows the client to pay the gross amount to the provider who, before investing it in the proposed bond, hives off the initial adviser charge and pays it to the adviser.

However, the initial advice will not always go to the client. Imagine, for example, a client who wishes to create a discretionary gift & loan trust.

Gift & loan trust

He sensibly approaches a professional adviser, who recommends the creation of a discretionary trust. Trustees are appointed and the client then lends them an interest-free loan, repayable on demand. The trustees seek investment advice from the same professional adviser, who recommends an investment bond.

Here, the arrangement is completed in two steps: the initial advice to create the trust is given to the client, whereas the initial advice to invest the cash that they have borrowed is given to the trustees. So any initial adviser charge for the first step should be paid by the client, but the adviser charge for the second step should be paid by the trustees.

As a result, the client pays his share of the initial adviser charge to the adviser and lends the balance to the trustees. The trustees then pay the loaned amount to the product provider and, before investing it in the bond, the product provider pays the initial adviser charge to the adviser and invests the remainder in the bond.

Ongoing adviser charges

Turning now to the ongoing adviser charges, where the bond is subject to a trust it will be the trustees’ responsibility to pay these, since it will be the trustees who will be receiving the advice.

Since the only asset they have is the investment bond, they will need to take partial withdrawals from it in order to pay the ongoing adviser charge. Clearly, this will have an impact on the 5 per cent tax-deferred allowance.