Broker funds are distributed and managed by life insurance companies and unit-trust managers.
These companies and managers influence and incentivise allegedly independent wealth managers, financial advisers and advisories to place their clients’ investment business within the broker funds.
These schemes have caused controversy in the UK, but remain common onshore and offshore.
Controversy comes from the fact the supposedly independent financial or wealth advisory firm that boasts about its “exclusive relationship” with a fund manager is being financially incentivised to vend broker funds to all clients.
And, because both the life company/fund manager and the independent financial advisory take a substantial cut, the schemes are very expensive for investors.
Onshore in the UK the supposedly independent advisory will typically receive a slice of initial commission between 3 and 6% for placing their clients’ money in a broker fund.
The management company will then charge up to 1.5% a year for looking after the money, while the IFA skims another 1 - 1.5% for its fund-management expertise.
Broker funds in the UK may need to achieve annual returns of at least 5% just to stand still.
Offshore, in the expatriate marketplace, it’s far worse.
Fees can be much higher for the unassuming investor who has been influenced by their supposedly independent adviser to invest in the broker fund that gives the adviser the best financial return.
What’s more, for any expat whose pension has been invested in broker funds, they are likely to be subject to trustee fees and wrapper fees on top of all the foregoing, meaning invested funds may be and remain in negative territory.
If you suspect you’re invested in a broker fund, the best advice is to have an immediate review of your holdings with a fee-based, chartered financial planner.