What is a discount broker?

This page talks about discount brokers for financial products, more specifically packaged investment products and insurance.

Discount Broker Definition
Why is commission paid?
What types of commission are there?
So what discounts are on offer?
How can discount brokers offer this service?
What about buying a product direct from the product provider?
What sorts of products are available through discount brokers?
What if I already have investment products?
Discount brokers can be a good place to get quotes for insurance and can be cheaper too
How do I know whether a discount broker is genuine?
A word of warning
Discount brokers for investments
Discount brokers for insurance
Price comparison sites for insurance
Other links

Discount Broker Definition

A basic definition of a discount broker might be an intermediary (distributor or middle man), who discounts the cost of an investment or insurance product making it cheaper for the customer.

Discount brokers offer discounts on a fund manager’s or insurance company’s charges. They can do this because part of these charges represent commission that is either paid to an intermediary or retained by the product provider if the product is bought direct. In addition a discount broker might have been able to negotiate lower up-front charges (initial charge).

A discount broker will typically rebate (or give up) part of the commission that they receive for arranging the sale of the product, but most operate an execution only service, which means that they offer no advice on which products a private investor should purchase.

To understand what a discount broker is we first need to understand a little more about commission.

Why is commission paid?

Although almost all product providers sell their products direct to the customer, a large number also rely on sales through intermediaries or middle men. Commission provides a way to pay the intermediary for making the sale.

Intermediaries can also facilitate customer choice by offering products from a range of providers. In addition, many intermediaries such as IFAs (independent financial advisers) offer advice. Commission provides an alternative to a fee to pay for the cost of this advice.

What types of commission are there?

There are two basic types of commission: initial and renewal (also known as trail, ongoing or servicing) commission. Initial commission is based on a percentage of the amount contributed, typically ranging from 0% to 5% for a unit trust for example. For insurance-based regular premium products such as endowments or term life insurance, initial commission is paid based on the first few years of premiums (the Initial Earnings Period or IEP), and may represent 25% or more of these premiums.

Depending on the type of product, renewal or trail commission can be based either on continuing contributions, or the total value of funds invested.

On a unit trust renewal commission typically ranges from 0% to 0.5% of the value of the investment. For endowments or term life insurance the renewal commission is typically 2.5% of each monthly premium following the IEP.

So what discounts are on offer?

You can find discounts of up to 100% of initial commission, but some discount brokers do charge a small fee. It is much less common to find discounts on renewal commission, but there are exceptions. It is a good idea to shop around to find the best combination of discounts for your particular product and circumstances. Note that for non-investment insurance products such as life insurance, discounts are usually built into the premiums quoted.

How can discount brokers offer this service?

A discount broker can afford to offer discounts usually by arranging on an execution-only basis, meaning they don’t supply any financial advice. This reduces their overheads and they pass the saving on to you. They make their profit from the portion of initial and/or renewal commission that they retain and/or by the fee that they charge.

What about buying a product direct from the product provider?

Commission is generally paid for out of the standard charges on a product. If you buy direct from the product provider, in most cases the product’s charges remain the same. However, some product providers do offer discounts for going direct, and some products have no commission attached to them so it is worth investigating where you can get the best deal.

What sorts of products are available through discount brokers?

Investment products include unit trusts, OEICs, stocks & shares ISAs,, maxi ISAs, VCTs (Venture Capital Trusts), CTFs (Child Trust Funds), endowments, investment bonds (including with profits bonds), and whole of life insurance.

The non-investment insurance products available include life insurance (both term insurance and whole of life), critical illness, and income protection insurance (also known as permanent health insurance, PHI). It is less common for this type of discount broker to offer products such as house or motor insurance.

What if I already have investment products?

Some discount brokers offer a service known as change of agent. This means that you can appoint the discount broker as your agent for your existing product. Although some product providers do not allow this, you can potentially benefit from any commissions still being paid on your product. These are likely to be renewal commissions so a key factor to consider will be how much renewal commission the discount broker will rebate to you.

If your existing agent is a financial adviser giving you an ongoing service such a change of agency would clearly be inappropriate.

In addition if you are contemplating transferring your PEP or ISA to a different product provider, this can usually be processed through a discount broker.

Discount brokers can be a good place to get quotes for insurance and can be cheaper too

You may already use a price comparison website to search for the best quote on life insurance for example. Some discount brokers also offer a quotation service. The discounts they offer can result in a cheaper quote so it is worthwhile trying out a discount broker for comparison.

How do I know whether a discount broker is genuine?

The Financial Services Authority (the FSA) regulates firms or individuals who arrange investments or insurance. You can check whether a firm or an individual is authorised by the FSA on the FSA register. Please see the FSA website for more information: http://www.fsa.gov.uk/register/.

A word of warning

Generally you will receive little or no advice from a discount broker, so only chase discounts if you have the knowledge and experience to make your own investment and insurance decisions. If you need an expert to help, then you should pay for financial advice.

Discount brokers for investments