Perpetual discounts end: Christine Stopp looks at the battle of the unit trust brokers

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The Independent Online
A SUCCESSFUL unit trust discount broker has been prevented from offering Perpetual personal equity plans to the public at a 4 per cent discount because of pressure on the unit trust group from other brokers who resent being undercut.

London broker Chelsea Financial Services claims that pressure from rival financial advisers has made Perpetual end special discount terms to CFS and other similar firms, only a fortnight after CFS sold pounds 1.5m in Perpetual units during a month- long special promotion.

Unit trust advisers normally get 3 per cent commission on PEP sales, paid by the fund managers out of the initial charge of 5 - 6.5 per cent. The adviser may forgo some of this, taking perhaps 1 per cent and passing the rest to the client as discount. When there is a special promotion, the unit trust group might offer a discount on top of the commission payment. In this instance, Perpetual was paying 3 per cent commission plus 2 per cent discount. CFS kept only 1 per cent, passing 4 per cent discount to the client.

These discount terms were Perpetual's idea in the first place, says Sam Simmonds of CFS, and the group was well aware that CFS was passing on 4 per cent to investors. Perpetual actually printed the broker leaflets with a '4 per cent discount' flash.

Perpetual is allowing other advisers, who operate by direct mail, to keep the original discount terms. The difference, it says, is that discount brokers like CFS have advertised in the national papers, creaming off response that would normally have gone directly to the group.

Particularly upsetting was a 'postage-stamp size' advertisement from the broker next to a pounds 20,000 full-page placed by the management group. Since the public can buy more cheaply through the broker than through the group itself, direct sales are lost.

Richard Cornick at Perpetual said that these brokers were 'undermining our commerciality. We can't just sit back and say 'do it to me again' '. He said he had received complaints from 'upwards of a dozen' independent financial advisers about the discount brokers' activities.

Mr Cornick admitted, however, that 'between 25 and 50' brokers had been operating on similar discount terms. The three discount brokers concerned accounted for about 10 per cent of the group's pounds 70m PEP sales in the month before the tax year-end.

CFS says it stopped 'postage stamp' advertising after Perpetual objected. Perpetual agrees it was not the main offender.

The group has written to CFS offering to reinstate discount terms, provided CFS takes the full 3 per cent commission, passes on only 2 per cent to investors, and does not advertise discounts.

Mr Simmonds said the whole affair looked 'like a concentrated effort to muscle out smaller brokers'.

Although the events have the air of a minor squabble, the implications for the unit trust industry are significant. PEP charges are under pressure as groups compete more and more for business and more publicity is given to the fact that the tax benefits are greatly reduced by high charges.

'We have always thought PEP charges were too high', says Sam Simmonds, whose group has always operated on 1 per cent commission, unlike other brokers that may offer a fuller advice service or have to carry high direct mail costs.

Not all managers agree with Perpetual. One well-known group said: 'The price of buying is too high, because the cost of distribution is too high'.

Another group, Barings, refused to deal with Chelsea in February 1990 because of advertisements offering discounts. Following publicity, Barings backed down.

Alan Wren, managing director of Invesco, was also in favour of 'anything we can do to reduce front-end costs'. He does not object to discount brokers offering 4 per cent off if it means 'getting the product into customers' hands for less cost. We have got to adjust our business to suit,' he said.

Nigel Legge, marketing director of James Capel, said he would not offer 2 per cent discount on top of commission other than as an occasional offer to liquidate returned units. He would not like to see his units advertised with a discount of more than 3 per cent, unless with the group's prior agreement.

One reason why the Perpetual PEP has caused so much rumpus is the fact that it pays an annual on-going commission to brokers.

Though nominally still advising the client after the initial sale, brokers may in practice do very little work for the 0.5 per cent a year paid throughout the life of the PEP. (PEPs are unlikely to be surrendered, since the investor would lose the tax benefits by doing so.)

This explains why they are happy to take so little front-end commission: annual payments would amount to pounds 7,500 on sales of pounds 1.5m - or pounds 30,000 free income for life if this level of sales is repeated for four years. It is not surprising that advisers feel they have something to fight about.

(Photograph omitted)

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