How to avoid paying trail commission

'Trail commission' - a regular payment made to your adviser by a fund manager - encourages that adviser to hold onto any fund you buy through them. Many see it a fair charge. We disagree. Here's how to avoid paying it.

Trail commission is a hidden nasty. Averaging about 0.5% a year, it is a regular payment made to your adviser by a fund manager. It gives that adviser an incentive to encourage you to hold onto any fund you buy through them. Many in the industry see it as a fair and straightforward way to charge clients. But we disagree.

"It can be a fair way to remunerate advisers, provided they provide advice in return," says Justin Modray of Candidmoney.com. "But a lot of them take it and don't bother actually offering advice and looking after their clients." That can make it expensive. Take a £250 monthly saving into a unit trust over 20 years with 6% annual growth, and a 1.5% annual charge with 0.5% trail commission. The value after 20 years, with no trail commission rebate, is £96,393. But with trail commissions re-invested, that figure rises to £101,864 (a calculator is available here).

The difference of £5,472 over 20 years gives your adviser a healthy incentive to keep you invested, even if you might be better off elsewhere. And these payments will not end until at least 2013, when new trail commission payments will be banned under the Financial Services Authority's Retail Distribution Review. Fortunately, there are ways around them now.

Cavendishonline.co.uk, for example, offers to refund the whole amount in return for a flat fee of £10 a year for unit trusts, says Modray. This is "likely to be a more cost-effective option if you have more than a couple of thousand pounds invested". Meanwhile, fee-based advisers, such as the London-based firms Yellowtail and Saunderson House, rebate all the commission to customers. Bath-based Chartwell, on the other hand, rebates 30% of trail commission to clients.

Better still, investment trusts (which are listed on the stock exchange) do not charge trail commission, pulling their total expense ratio down below the average 1.75% for unit trusts, which also helps them to outperform. According to the Association of Investment Companies, £100 invested in the average investment trust over ten years would now be worth £175, compared to £140 for a typical unit trust. What's not to like about that? Or you could invest in the still-cheaper exchange-traded funds.

Recommended

The top funds to invest in
Funds

The top funds to invest in

Investors continued to the passive preference throughout May, while high-yields were also sought. We look at the top funds, stocks and trusts that inv…
5 Jun 2023
£1.7bn sitting in unclaimed Child Trust Funds – here’s how to get the money back
Personal finance

£1.7bn sitting in unclaimed Child Trust Funds – here’s how to get the money back

Millions of pounds are sitting in languishing child trust funds. We look at how to track them down and how to make the most of your child’s savings.
22 May 2023
It’s fallen hard – but is now the time to buy Scottish Mortgage Investment Trust?
Investment trusts

It’s fallen hard – but is now the time to buy Scottish Mortgage Investment Trust?

Shares in the Scottish Mortgage Investment Trust have plunged 45% since the beginning of 2022. We take a look at the trust's performance and discuss w…
22 May 2023
A private equity approach to public markets
Funds

A private equity approach to public markets

A different approach to capitalising on low UK equity valuations.
17 May 2023

Most Popular

Best savings accounts – June 2023
Savings

Best savings accounts – June 2023

Interest rates have been creeping up - we look at the best savings accounts on the market right now.
6 Jun 2023
Nationwide to give £100 cash boost to customers
Personal finance

Nationwide to give £100 cash boost to customers

Nationwide Building Society is giving customers £100 as it reinvests profits. Dubbed the Nationwide Fairer Share scheme, we look at who is eligible.
22 May 2023
The top funds to invest in
Funds

The top funds to invest in

Investors continued to the passive preference throughout May, while high-yields were also sought. We look at the top funds, stocks and trusts that inv…
5 Jun 2023