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Jargon Explained

"I looked at the UK investment market and thought it could do with a shake-up."

Tom Russell InvestSmart

Glossary of Terms

Bonds:

An Investment Bond is a type of investment wrapper. A typical bond pays commission to a financial advisor of around 7% of the investment value. This is sometimes paid as a lump sum when the investment is first taken out (in which case it cannot be reclaimed). In other instances the payment is made in the form of a annual trail commission of up to 1% of the fund value. Future trail commission can be rebated.

Commission:

Commission is a payment made by investment fund managers to the advisor that sells the product. A typical unit trust, for example, pays 3% initial commission and 0.5% each year (trail commission). The commission is deducted from your investment.

Financial Advisors:

Financial advisors make investment recommendations to their clients. They are either IFAs (Independent Financial Advisors) who offer a range of providers’ products, or they are tied advisors, representing a single product provider. 

ISAs:

There are two types of ISA: Cash and Stocks and Shares. A Cash ISA is simply a tax free cash account on which no commission is payable. The underlying investment in a Stocks and Shares ISA is usually a Unit Trust on which commission is payable.

Pensions:

Pensions are a long term investment vehicle that attract tax relief. There are a huge range of pensions including RACs (Retirement Annuity Contracts) SIPPs (Self Invested Personal Pensions) and EPPs (Executive Pension Plans). Most of these pensions have some form of commission built into them.

Retail Distribution Review:

The Retail Distribution Review came into force on 1st January 2013. The new rules banned commission on advised sales from this date. Investments purchased after 1st January are likely to include an annual advisor charge instead of commission.

Commission will continue to be paid on investments purchased before 1st January and on non-advised sales. These are funds purchased directly, without advice, from the investment managers or via on-line brokers.

Unit Trusts:

Unit trusts are the most common form of investment wrapper. Most unit trusts include a 3% initial charge and 0.5% yearly trail commission charge.

John and Helen Reid

"It came as a surprise to us that we were paying a trail commission even though we never received any advice"

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