Discount houses are the forgotten heroes of financial services. Many people know little about the services they offer and don't realise how much money they can save.
There are around a dozen discounters in the UK selling PEPs, pensions, with-profits bonds and life assurance at cut-price rates. They save you money by reimbursing nearly all the commission paid to them by the product provider, which most financial advisers keep. This commission is funded by the charges you pay on financial products. Even when you buy a PEP direct from the company, you still pay commission, except the provider keeps it for itself.
There is no catch to discount services and there are no hidden charges. They are streamlined organisations working to tight margins. They can afford to rebate nearly all commission by having low overheads and selling millions of pounds-worth of policies every year.
They either reinvest the commission into the product or pay it as cash. The other reason the service is so cheap is that they do not give any advice. They run what is known as an "execution-only" service: investors do their own research and come to their own decisions; the discounter simply arranges the transaction.
"Normally you save money by cutting out the middle man," says Sean Kingston, director of discounter Hargreaves Lansdown. "In this instance the middle man is actually reducing the cost, and that is rarely understood by the investing public."
Hargreaves Lansdown rebates up to 5.5 per cent commission on many PEPs - a saving of up to pounds 330 if you pay the full pounds 6,000 into a PEP. For example, it will save pounds 300 on Perpetual, pounds 240 on Jupiter and pounds 300 on Invesco products.
The company makes its money on the 0.5 per cent annual renewal commission paid on a PEP. It comes out of the annual management charge on the fund itself (usually 1 to 1.5 per cent), Mr Kingston says.
Hargreaves Lansdown also offers discounts on personal pensions, returning 80 per cent of the initial commission. In addition, it offers corporate and with-profits bonds and term assurance at a discount. Other discount houses also rebate pensions but not all of them: some are deterred by their complexity.
Chartwell Investment Management specialises in with-profits bonds, which are insurance-based investments with a notoriously high level of commission, often as high as 6.75 per cent. Chartwell returns a flat 5 per cent of commission on all bonds and keeps the remainder. It sells pounds 1m of with- profits bonds every day. Chartwell charges a fixed fee on other products, for example pounds 20 for setting up a PEP with all initial commission returned and pounds 35 for a unit trust.
Paul Penny, managing director with Financial Discounts Direct, says the type of people using discount houses varies. "Some people are very clued up and know what they want. Others are simply obsessed with getting the biggest discount. They might choose their discount house based on whether it provides a stamped, addressed envelope, for example."
Discount houses have come in for criticism for selling products regardless of whether they are suitable for the customer. Mr Penny recognises this can be a problem. "It is difficult to know whether somebody is buying the right product. But on rare occasions I have advised against somebody buying something that is not in their best interests," he says. "We are not against financial advisers. If you are comfortable with buying a PEP without advice, then that's great, but if not it could be a false economy and it may be better to pay for advice."
Mr Penny says discount houses have to be careful about pointing customers in the direction of particular products as they are not regulated by the Personal Investment Authority and this could be seen as giving advice. Some discount houses, such as Hargreaves Lansdown, do have an advice arm, although, of course, if you choose this option, your discounts will be reduced.
Janice Thomson, managing director of discounters Chelsea Financial Services, warns that when buying through a discount house it is important not to be dazzled by the size of the discount; it is the quality of the product that matters.
"PEPs with the biggest initial charges will inevitably give the biggest discount, but don't think that necessarily means they are the biggest bargain," she says.
If a PEP pays 5.25 per cent initial commission, the discount will inevitably look more attractive than on a PEP only paying 3 per cent, she says. But performance is what counts.
"A good fund will outperform a poor fund by 1 per cent in no time flat. Jupiter is performing better than Perpetual, so the 1 per cent difference in discounts is irrelevant," Ms Thomson says.
BEST PEP SAVINGS
Discount house Best saving on pounds 6,000 PEP
Chartwell Inv Management pounds 300: Invesco/Perpetual
Chelsea Financial Services pounds 330: Save & Prosper
Financial Discounts Direct pounds 330: Newton
Hargreaves Lansdown pounds 330: Save & Prosper
0117 900 9000
Allenbridge pounds 300: Jupiter
PEP Direct pounds 315: Newton
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