I’m no fan of commissions, in fact I wish the FSA had ditched the whole wretched system years ago in favour of total transparency. But I do however accept that, although sometimes abused, a modest initial commission with ongoing trail allows IFAs to make an honest living from advising clients who refuse to write out a cheque for financial advice and want face to face service. The existence of trail commission should give advisers a financial incentive to continue looking after clients and it empowers clients by allowing them to take their custom (and trail commission) elsewhere if they feel their adviser is not providing satisfactory service.
This scenario, to me, appears to be treating both customers and advisers fairly. The adviser gets compensated for work done and the client receives ongoing service with the power to switch to another adviser (without necessarily having to write a cheque) if unhappy.
So Mr Fisher’s comment that “If anyone is saying that they are taking this trail commission and using it to pay for servicing clients then they would be in a serious position” doesn’t make much sense to me.
I would argue that advisers should be in a serious position if they are taking trail commission and doing diddly-squat to earn it – the ‘hit and run’ sales approach that has blighted the financial advice industry all too many times over the years.
As for persistency, in my experience advisers rarely sweet talk clients into keeping a product that’s unsuitable so they can pocket trail commission. If anything, they’re more likely to be guilty of encouraging a switch when there’s no need in the hope of pocketing some initial commission.
Anyway, for what it’s worth, I’ve got a few ideas that could help prevent this type of mess from happening in the future.
1. Compel advisers to get a written (or online) authority from their client every two years confirming they’re happy for the adviser to continue receiving trail commission. If not received, the ongoing commission would then be diverted into a ring-fenced FSCS ‘pot’ until such a time that the client appoints another adviser as agent. This would remove the trail without service problems and the ‘pot’ could then help reduce the extent that decent advisers have to subsidise the actions of irresponsible ones via their FSCS levies.
2. Where an adviser buys the assets of a troubled firm while burdening the FSCS with liabilities, the adviser must get authority as above within a year of acquiring the assets.
3. Ban initial commission on product sales that involve moving from another product sold within the five previous years (with a few obvious exceptions such as a pension being used to buy an annuity).
For as long as the public don’t all want to pay an hourly rate for financial advice, then trail commission (or ‘fees’ taken as a percentage of assets under management) has a role to play in funding ongoing service and advice.
The key to treating customers fairly is to ensure they actually receive that service and advice.
Justin Modray is founder of consumer website CandidMoney.com