Commission refunds

If you’re in a retail or for-profit superannuation fund, you are probably indirectly paying commissions to a financial adviser. Retail fund providers include large financial institutions such as AMP, AXA and Colonial First State.

The upfront commissions could be up to 5% from each contribution you make — all but one of the rebate companies we compared “dial down” these entry fees to nil. Superannuation trail commissions are usually about 0.5% of your fund’s balance each year – $500pa for a $100,000 super fund.

Paul Brady of commission rebate company YourShare.com.au says a trail of 1.1% or even higher is not unusual: “1.7% is the worst I’ve seen. It applied to a client who was intending to move to an industry super fund after she hadn’t seen her financial planner for a number of years.”

We’ve compared the annual trail refunds provided by these companies on different superannuation balances, assuming a 0.5% annual trail commission (see the table). The best performers for a superannuation balance up to $50,000 are:

• Commission Refunders
• iRefund
• MyMoney
• Refund Easy
• YourShare.com.au

For a single fund with a balance of $75,000-$200,000, Dixon Advisory offers the best refunds, ranging from $225 to $850. However, unlike most rebaters, Dixon charges $150 fee per product, so if you register for commission refunds on two managed funds and a super fund, Dixon’s fee is up to $450.

Table notes

Assuming 0.5% annual trail commission.

na - Not applicable.

* Commission Refunders has been trading for less than a year, but its parent company has been refunding commissions for eight years.

** Trading for approximately one year, however management involved in rebating commissions for over ten years

(A) - The trail commission is less than the rebate company’s minimum fee.

Table notes

(B) Through wrap accounts, a type of financial product that “wraps” all your investments into one account.

Managed funds

Similar commission rates apply to managed funds. But even if you bypass advisers and invest with the fund manager directly, the high entry fee of up to 5% usually still applies. Instead of passing it as a commission to a salesperson, the fund manager keeps the commission for itself.

Using rebate companies and discount brokers can work out cheaper, or you could invest in a low fee fund that doesn’t pay kickbacks.

Several companies in the table don’t generally refund managed (or super) fund trails, but they scrap entry fees. Some promote themselves as fund “supermarkets”, displaying various investment funds on their websites and abolishing entry fees, making investing in their selected funds cheaper than going through an adviser or directly to the fund manager. These fund supermarkets don’t provide advice, but some offer third-party research to customers to help their investment decisions.

Commissions on life insurance policies are staggeringly high. The kickbacks on life, income-protection and total and permanent disability policies sold by planners can be weighted so the salesperson receives a large upfront commission — sometimes up to 120% of the first year’s premiums — and continues to receive trails of about 10% in subsequent years. Or, the commission is spread across the life of the policy so the adviser receives about 30% every year for as long as you have the policy.

The companies in the table rebate various portions of these commissions and all but one rebate the full initial commission (iRefund returns 50%). Refund Easy charges $500 to set up new life policies, rebating the remaining commissions. When setting up a new policy, as well as considering buying through these rebate companies if you don’t need advice, insurance through your superannuation fund is often relatively cheap and tax-effective.

Home loan warnings

Mortgage brokers are usually paid an initial commission of about 0.6% of the amount you borrow. They also receive an annual trail of about 0.2% of the remaining loan balance. So, if you spent a few hours with a broker to arrange a $400,000 home loan 10 years ago, initially they would have received $2000-$3000. If after 10 years the loan is worth $300,000, the broker would have continued to receive an annual cheque from your lender for about $600 — a pretty big reward for a few hours’ work a decade ago (and they’d get more if the loan was interest-only).

A few companies in the table, and other mortgage brokers, rebate home-loan commissions, however, there’s a big catch: lenders aren’t allowed to simply redirect the broker authority to the rebate company. To get commission refunds, you need to refinance, get a bigger loan or arrange a new loan with a different lender.

Before switching lenders, weigh up the costs of leaving your present lender against the benefits of the new loan. You need to take into account exit fees and early repayment fees, which are often highest in the early years of a variable rate loan, and always apply with fixed rate loans.

Low-cost lenders that bypass brokers and their commissions can work out cheapest. Our mortgage switching research showed community-based credit unions and direct online lenders are worth considering. Otherwise, a discount broker that refunds part of the commissions from other lenders is worth a look.

Q Will my planner be angry if I switch? Could he/she contact me and complain?

A Possibly. But rebate companies argue that if a customer is switching away from their adviser, chances are the adviser wasn’t providing much of a service so they’ve little to complain about. If you get a confronting phone call from a planner you’ve ditched, you can make a formal complaint to the Financial Ombudsman Service.

Q Is there a downside to these rebate services?

A Some rebaters are small start-ups without much of a track record. They may struggle to be viable if investment commissions are banned. Another criticism is that some rebaters are primarily financial planners looking for new customers. However, rebate companies offering financial advice separately would argue it’s a valuable service to those who want it. In the case of Dixon Advisory and some others, advice is provided on a fee-for-service (no commission) basis.

Q What are the disadvantages of leaving my adviser or insurance broker?

A If you want advice, you’ll have to pay for it separately. However, that’s not necessarily a bad thing — you’re more likely to get good advice if it hasn’t been tainted by commission payments that cause conflicts of interest. If you need to make an insurance claim, you won’t have the adviser to help you – you’ll need to contact the life insurance company yourself.

Q Do commission refunds apply to other financial products?

A The list is growing all the time, and some of the companies we compared can offer rebates for the commissions on real estate, cash management trusts, general insurance (home and contents, travel, motor) and many types of personal loans. As always, make sure you read the product disclosure statement and understand the implications, before making any decisions.