The discounters, who gain most of their most business through press adverts and mass mailings to existing clients, can operate on slim margins because they do high-volume business in popular funds. The fact that the work is on an "execution only" basis (without personal financial advice) also frees them from significant regulatory costs.
Janice Thomson, director of Chelsea Financial Services, says: "It's like shopping at a supermarket, or at a delicatessen. If you want a lot of information about what you are buying you chat to your grocer or IFA, but if you don't you are clearly better off buying from a supermarket or discount broker."
Most investors who use their full pounds 6,000 annual allowance to buy a unit trust PEP via a discount broker will receive an additional allocation to units of 3 per cent, worth pounds 180. This is because, unlike other intermediaries, most discounters give back the entire initial commission they receive from the fund management group (normally 3 per cent). They derive their remuneration only from the 0.5 per cent annual renewal commission.
When dealing in unit trusts bought outside a PEP, however, the discounters normally keep 1 per cent of the initial commission for themselves because unit trusts tend not to pay renewal commission. Similarly, because most investment trusts and investment trust PEPs do not pay any kind of commission outside of new launches, discount brokers rarely deal in them as there is little scope to offer discounts.
Strangely enough, dealing through a discount broker is even more cost- effective than dealing directly with the fund management groups that provide the PEPs.
PEP providers do from time to time advertise special offers involving small discounts, but most of the time investors who approach them directly are required to pay the full initial commission, just as they would have to if receiving advice from an IFA.
Gary Marshall, managing director of Aberdeen Prolific Unit Trust Managers, says: "The situation can seem illogical to many customers as it isn't always immediately obvious that the infrastructure that supports them and attracts them in the first place has a cost. We find that the costs of advertising, sending out information and running our customer helpdesk are broadly similar to the costs of paying commission to IFAs."
Shopping around between different discounters can be worth while because not all have identical charging structures. Some actually discount more than the standard initial commission on particular funds by using them as loss leaders or by negotiating special bulk deals with suppliers. The PEP Shop, for example, is offering 4.5 per cent off Jupiter PEPs, and Power Robbins is offering 5 per cent off Perpetual PEPs.
Others charge slightly more than average. Pepdirect is unusual in making a pounds 25 handling charge, and Chelsea Financial Services only rebates the full initial commission on its six most popular PEPs, keeping 1 per cent on others.
Garrison Investment Analysis and Unitas tend to keep 1 per cent of initial commission on all PEPs, but are unusual in maintaining the same charging structure for those who require personal financial advice rather than operating on an execution-only basis. In effect, the extra charge is therefore a cross-subsidy. Most other discounters do not give advice, or provide it only via a separate IFA arm that keeps most or all of the initial PEP commission.
Discount brokers stress that people should not go the execution-only route unless they fully understand the risks involved with dealing in the stock market and are prepared to take full responsibility for fund selection.
Anyone who has any doubt as to whether they have selected the right fund - or whether they need a PEP at all - should certainly seek advice and be prepared to pay the full initial commission as a result.
Haydn Green, the managing director of The PEP Shop, says: "Equities rise 70 per cent of the time and fall the other 30 per cent and unless you are willing to patiently sit through falling markets you shouldn't invest. We want long-term investors, not people who cut and run at the first sign of a wobble."
Those wishing to deal with discounters before the end of the current tax year have not left it too late. They should, however, move swiftly as a PEP transaction cannot simply be completed over the phone. Forms must be ordered from the discounters, completed, signed and returned to them. The discounter must then forward the form to the PEP provider. Some PEP providers are continuing to process applications over the next weekend, but most are stopping this Friday.
If everything goes smoothly, a PEP can be effected within three days of phoning the discounter. Forms that are incorrectly completed, however, have no chance of making the deadline.
Peter Hargreaves, managing director of Hargreaves Lansdown Asset Management, says: "The number of PEPs that fail at the 11th hour is phenomenal, because around 15 per cent of all applications contain mistakes and these take several days to correct. Many people forget to sign their forms, say which tax year is involved or make errors on their cheques."
Cheques drawn from building societies are a particular problem area. A building society cheque which does not bear the applicant's name must be accompanied by confirmation in writing by the society that it has come from the applicant's account. Unfortunately, however, this requirement is commonly overlooked.
Some discount brokers also offer life assurance, pensions and other investment products, but with the notable exception of with-profits bonds, their services in this respect have met with comparatively little demand.
Some of the deals available on pensions are particularly attractive to sophisticated investors who know exactly what they require. The Pension Shop, for example, can normally refund the entire initial commission on lump sum contributions made to personal pension plans on an execution only basis. Nevertheless, most people undoubtedly will require personal financial advice when planning their pension scheme.
q Contacts: Chelsea Financial Services, 0171-351 6022; The PEP Shop, 0115 982 5105; Garrison Investment Analysis, 01482 861 455; Hargreaves Lansdown Asset Management, 0117 900 9000; Elson Associates, 0500 691 790; Power Robbins, 01372 457 965; Unitas, 01724 849 481; Pepdirect, 0800 413186; The Pension Shop, 0115 947 0247.Reuse content