Everything you need to know about Pension Transfer Fees
Some companies charge high fees for pension transfers, others charge low fees – and some charge none at all. What’s the difference? What’s the risk of taking up a free service?
When you’re offered something for free by a commercial company in a capitalist market, what do you think? ‘How kind’? ‘What a good company to work for nothing’? It may seem suspicious because nothing is truly free and anything that claims to be free is either terrible quality or comes with strings attached.
We know this through our life experience. Everyone has at some point fallen for a “freebie” that seems too good to be true, usually with negative outcomes. One thing remains true in the exchange of goods and services: altruism is not a fundamental principle of capitalism.
Altruism is not a fundamental principle of capitalism
An ideal definition of a business is one which works efficiently and profitably but with the clients’ interests at heart. If an investment advisory business isn’t profitable, it will, of course, cease to exist.
In 2017 a well-intentioned investment adviser sold his business to another investment adviser and left the investment advisory industry feeling disillusioned. He moved on to try to develop a successful career as a mortgage broker.
The first thing the investment adviser who purchased the business did was double the fees.
None of the clients objected to paying reasonable fees to the new investment adviser for a reasonable service.
A business can’t function effectively when significantly discounting fees unless there are fish hooks involved. They can discount a service or fees in order to draw in new clients, or temporarily to reward current clients for their loyalty, but if it ends up costing the business, then offering discounts and freebies isn’t a smart move for anyone involved.
A business built on freebies and reduced fees is not sustainable.
If a financial advisory business fails, the client will need to find a new investment adviser and the employees and shareholders of the failed company will be devastated to see their livelihoods evaporate. There will be no winners except for the bargain price the new investment advisory firm pays for the failed business.
An investment advisory business can operate profitably while charging reasonable fees – there is no need to charge excessive fees. New Zealanders are intuitive, and can spot greedy businesspeople a mile away. Long term business relationships will only be successful when the client trusts that they are receiving advice with integrity, and when they know they are not being ripped off.
How does a free pension transfer work?
How can an investment advisory firm waive entry fees and remain profitable? Easy – once you are invested, you will pay higher ongoing fees. The majority of investment advisers charge them. Ongoing fees enable the investment advisory firm to provide ongoing investment advice, and enable the firm to remain profitable.
The cost of running an investment advisory business, just like law firms and accountancy practices, is high. It can take many years to build up a successful business. Until there are sufficient funds under management, how can an adviser pay for office support staff, rent, software, research, insurance, compliance, ongoing education, attend symposiums around the world for professional development, and so on?
What about investment advisers who are just starting out?
A young investment adviser cannot charge higher fees because they have relatively low investment funds under management. Often the only way a new adviser can enter the industry is to buy into an existing business. An established business may be willing to pay a young adviser and assist them financially to buy a portion of the business. When they have ‘skin in the game’, they’re more likely to be focussed on getting an optimal result because ultimately some of the profits will come back to them.
So what do pension transfer and management fees really look like?
The majority of investment advisory firms charge a fee to facilitate the transfer of a pension to New Zealand.
For example, this fee could be a flat rate of 5% for the whole amount to be transferred.
Other advisers might discount their fee down to 0.5% or not charge an initial fee at all. In this case, the investment advisory firm has made the decision to entice new clients by offering no initial fees because they want to make their profits from the on-going fees.
The downside to this strategy is when the amount to be transferred is very low. When the firm transfers pension funds at a loss, ongoing fees are relatively low but this is not profitable over the longer term. Unless the ongoing fees are very high and ideally (for the firm) the client agrees that they will remain invested with the firm until they are at least 55 years old, this is not a sustainable business model.
A free transfer might be tempting if you’re trying to save money, but in the long-term, the higher fees could end up costing you more.
Try asking for a pension transfer discount
For a pension transfer that has a value of more than $1,000,000, it is reasonable for the investor to expect a discount on the cost to transfer.
How much more work is there in transferring a large pension compared to transferring a small one? There may be some more work involved because a more sophisticated investment portfolio should be set up, and the longer-term financial requirements are likely to be more complex.
Nevertheless, asking for a discount is a fair and reasonable request.