Virgin Direct's tracker PEP not only highlighted the fact that many tracker funds outperform actively managed funds, it also introduced radically lower charges than its competitors.
Accusing most other PEP providers of talking hot air, Mr Branson declared that there was no need to impose high and complex fees on consumers. Many PEP funds were charging a set-up fee of around 5 per cent to 6 per cent on top of an annual fee. Before Virgin's entry into the market, several providers, including M&G, already levied no initial fee, but linked this to exit charges if the investment was cashed in before five years.
Virgin did away with the idea of an initial fee, arguing that a 1 per cent annual fee was adequate to run the PEP. Gartmore, another popular investment manager, rapidly followed suit. Since then the battle has raged to see which tracker fund can offer the lowest fees, and a price war also has ensued throughout the rest of the market.
As Martin Campbell, product development manager at Virgin Direct, points out: "Not only did we force other providers to take the direct route, but we also forced down charges. Annual fees of around 0.75 per cent to 1.5 per cent were typical when we first entered the market. But it was initial charges that particularly came under threat. These used to be around the 5 per cent mark but many are now down to 3 per cent or less," he says.
Nowadays, tracker PEPs typically charge no initial fee and an annual fee of between 0.5 per cent and 1 per cent, although there may be an exit charge of 0.5 per cent when you cash in the PEP.
While an actively managed fund may charge an initial fee of around 3 per cent some have also scrapped their initial charge altogether. The annual fee on a managed fund usually is between 0.5 per cent and 1 per cent, although some PEPs have a flat annual fee of, for instance, pounds 50.
Many of the large investment houses, including Fidelity, Gartmore, Legal & General and M&G, have joined the trend to lower charges. Only a few PEP managers, such as Perpetual (which is highly rated for the performance of its funds) have been able to maintain their front-end charges of 5.25 per cent.
The price war has extended from the PEP providers through to brokers who act as middlemen selling a range of PEPs direct to the public. Leading this assault on charges are the execution-only brokers who earn their money by receiving commission from the PEP providers every time they sell one of their plans.
Instead of taking all the commission for themselves they have been giving clients some of this commission, in effect reducing the upfront charges on the PEP for the client.
Some brokers, such as Chelsea Financial Services, which recently launched the PEP Superstore, pass all the commission back to clients on certain PEPs. In this case the only money the discount broker makes is the renewal commission it receives from the PEP provider each year that the PEP continues to run. Renewal commission is usually between 0.5 and 0.75 per cent of the original investment.
Some discount brokers have gone even further and will actually pay the client a cashback if they take out certain PEPs. For example, Chelsea's PEP Superstore will pay 0.75 per cent, or pounds 45, on a pounds 6,000 investment in Legal & General's tracker, while the PEP Shop in Nottingham offers to beat any other broker's deal.
The range of PEPs available through a discount broker varies from firm to firm. It is based largely on the renewal commission payable and means that up to 75 per cent of generally available PEPs may not be obtainable through an execution-only broker.
But the range of PEPs available and the amount of PEPs being sold through these outlets is increasing. Around 10 per cent of PEP sales now are estimated to be through execution-only discount brokers.
Independent financial advisers have reacted in a number of different ways and many are now offering rebates of at least part of their commission. Brian Jones, of Garrison Investment Analysis, in Leeds and Sheffield, explains: "We are happy to listen to a client and prepare a report setting out where we believe he should be investing his money. That cannot be done for free. We are not an execution-only service. We charge 1 per cent and rebate the rest back to the client."
Remember, though, that execution-only brokers do not offer advice. They will tell you what they have to offer and give an indication of a fund's recent performance but, in the words of Blind Date, the decision is yours.