His booklet The Small Print is an attempt to explain in simple terms the impact of charges on pension plans.
One client who came to him for advice was aghast to find he had probably forfeited around pounds 250,000 already because of pension choices made in the past, he says.
Colin Lloyd founded a marketing services company which he sold in 1990. On leaving, he decided to put his own finances in order.
Mr Sheffield showed that the large initial charges on Mr Lloyd's plans - he had four with well-known insurers - had damaged the value of his eventual fund. 'If I had started my own pension scheme and put it all in the building society I would be 20-30 per cent better off,' Mr Lloyd said.
Pension commissions have increased over the years, but a greater problem is that a large percentage of the annual commission is paid to the broker 'up front'. This means a high initial charge on the policy, which may take up more than a year's contributions. The loss of contributions at the start of the policy's life has a disproportionate effect on the fund built up in later years.
A 25-year pension plan with contributions of pounds 200 a month would typically yield initial commission of pounds 1,500 to the the adviser. Taken as an initial lump sum, the pounds 1,500 would reduce the value of the fund by pounds 24,225 over its life. By spreading the pounds 1,500 over the full policy term, the charge on the pension fund is only a third as much: pounds 8,085.
Paying out high commissions at the start of the plan also means that transfer and surrender values are poor. The investor who wants to stop making contributions or to switch to another fund manager has to repay the insurer for all commission paid at the start to the broker. After two years, average transfer value would be pounds 2,362 on contributions of pounds 4,800. The worst plans have a nil two-year transfer value.
AIS tries to get round these problems by charging a once- only initial fee of pounds 500 to the client and then taking the commission paid by the insurance company in annual instalments. Mr Sheffield says that this system should make savings for clients putting around pounds 200 a month or more into pensions. For those making lower contributions, he works for half the normal commission rate.
Commission is a big issue at present following a hard-hitting report from the Office of Fair Trading and recommendations that the amount of commission should be disclosed at the time of sale. Such moves have made brokers consider new methods of remuneration.
Harry Spence of Scottish Equitable expects increased demand for level-commission plans, though people seem to 'prefer the traditional way at present'. He thinks that more flexible commission products will be available in a year.
A change in the way they take commission will alter the structure of many brokers' businesses. At present they are geared towards new contracts rather than a follow-up service.
Level commissions mean lower overall receipts and poorer cash flow for the broker, but the business will build up a stream of annual renewal commissions, giving an incentive to maintain client loyalty.
Low charges may lead to a lower level of service. Mr Sheffield admits that he cannot afford to visit clients personally, so those who cannot get to his office will have to rely on a postal service.
With the traditional commission system, a policyholder who increases contributions has to pay initial charges every time. With his method, says Mr Sheffield, there are no further start- up charges, though the broker will get 5 per cent a year of the new premium level.
While 5 per cent might sound a lot, Mr Spence argues that it is low - Scottish Equitable has been asked to arrange level commissions of up to 8 per cent.
'The Small Print' is available free from AIS on 081-543 6698. Many readers have phoned to ask for details of Pensionline, the commission rebate broker mentioned on 6 March. Pensionline's number is 081-643 9663.Reuse content