AMDs are the way forward for AMC-based commission.
There is no way forward for AMC-based commission. In fact, we believe AMDs represent the death throes of this charging shape. Persistency is plummeting and so the cost of paying AMC-based commission is rising sharply. The options open to providers are to either cut commission or hope noone notices a charge increase.
There’s no problem if you transfer out paid-up customers.
Providers can choose which advisers they deal with and if they’re losing money because customers are transferring or are being transferred away, will they continue to offer the AMD model? It may be worth asking them. The last thing advisers want is for the rug to be pulled out from beneath them.
The contract is cheaper.
It may seem so to start with. But FSA persistency reports suggest that over 50% of GPP policies written recently stopped paying premiums within four years. And most providers’ experience will suggest that an average policy is expected to stay paid-up with the provider for many years after ceasing premiums. That’s a lot of extra charges and a compelling reason why advisers should look beyond the discount.
AMDs are a way of rewarding longer-term employees.
How long is long term? Is it 20 years, or perhaps 30? How many employees will actually expect to be with the same employer for that amount of time? In terms of pounds and pence, employees who leave after 20 or 30 years will actually be paying more than those that only lasted 4 or 5 years – simply because their funds will be higher when the additional charge is applied. So do AMDs actually do what they say on the tin in this respect?
AMDs will offer AMCs that rival Personal Accounts.
Again, maybe that will be true while the member continues to contribute. But the simple fact is that noone knows yet exactly what the Personal Accounts charging structure will actually look like. It’s unlikely that it will have AMDs however. It’s expected (perhaps inevitable) that some employers will close any existing scheme and auto-enrol their employees into Personal Accounts instead. In other words, all the members will effectively be paid-up and will have to pay increased charges. Is that really what employers want? And remember, right now, there is no proposal to allow the transfer of benefits into Personal Accounts, albeit that this is to be reviewed after 2010.
RDR vs AMDs.
Commission through AMDs still involves the provider telling you what value they place on your client’s scheme and this flies in the face of the RDR Interim Report’s challenge for providers to stay out of setting adviser remuneration. Customer Agreed Remuneration (CAR) is the future. We can’t see how AMDs with commission are compatible with CAR.
AMD structures seem to be a short-term solution to a long-term problem. Only time will tell whether there will be mis-selling or TCF implications for advisers offering such terms. The best you can do is to ensure that you have fully understood all of the above potential pitfalls before recommending them as being in the best interests of scheme members.