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Alistair Cunningham: FCA should introduce clear trail sunset

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Whether you are religious or not, there is a lot to be learned from the Serenity Prayer. I try to focus on the things I can change and avoid wasting my time on things I cannot.

The FCA has suggested the termination of trail commission and, as discussed on the pages of this paper, this may or may not be legal. But shouldn’t a right-minded adviser try to change the perceptions of their clients, rather than try to sway our regulator?

The argument that commission is a contractual right seems moot. Rules change and this is always a risk, but I do also believe there should be protections in place. Currently, removing commission across all plans may not actually benefit all clients.

My opinion is ongoing fees (or commissions) should be tied to an ongoing service. To this extent I have operated a ‘fee based’ model since becoming an adviser over a decade ago. For those clients where advisers chose to be paid 3 per cent initial commission and 0.5 per cent ongoing, would it been justifiable to take 7 or 8 per cent upfront?

In my experience, having the conversation with clients and prospective new clients is refreshing. Clients frequently overestimate what advisers earn. Therefore any new arrangement, agreed by both parties, needs to be separately charged and costed.

On those occasions where ongoing commission is due it may offset some, or part of our fees, but the key is to be transparent. Alternatively, it is common for a new style platform to offer investments, and funds for around 0.5 per cent. Even considering initial fees, and comparing to stakeholder it does not take very long for a client to benefit from that kind of deal.

Dealing bias? Seems to me to be common sense.

Adding ongoing fees may narrow the cost benefit to the client, but if they do not value the service, they turn off the fees.

Journalists have demonised commission – “one of the industry’s best kept secrets” – a description used while promoting Ivan Massow’s cynical attempt to persuade investors to register a large proportion of their trail commissions to his firm. He has subsequently pulled the rebate service and initially suggested his firm would keep all the trail if clients do not move, adding more fuel to the fire of public discontent.

Conversely, firms may not make changes to clients’ policies to avoid losing commission. Bear in mind the rules currently do not affect insurance wrappers – for example pensions and bonds.

This does seem to be an anomaly; but what is quite frankly offensive, are the life assurance firms and fund managers who seem to have been looking for the vaguest excuse to turn-off commissions with no net client benefit.

To cite an example, which is by no means unique, it was recently reported that Aegon would, in some cases, keep the commissions where a client is ‘inactive’ for three years. It is quite feasible, and in my mind absurd, that just because an adviser has made no changes to a client’s policy in three years that a provider would deem their right to commission supersedes the advisers.

So with Isas and collectives there is a perverse incentive to do nothing, and with some insurance wrappers doing nothing for a period may prejudice adviser remuneration!
It strikes me the logical option is a regulator-enforced sunset on trail.

The FCA should do this with a very clear, not too challenging deadline – say 31 December 2015. At this point all providers should be forced to write to all clients saying “Your adviser is receiving x per cent per annum, which has been £x over the past twelve months. If you do nothing this will continue, or sign here and we will rebate this directly into your plan.”

The FCA should prohibit anything other than a 100 per cent client benefit where a response is received (it would be useful if the FCA could remind HMRC that commission is simply a factor of product charges, and therefore not taxable – but I won’t hold my breath).

Clients who value their adviser could do nothing and trails should continue. Those with disparate pots would be incentivised to get meaningful joined-up advice from one firm. Finally, for those who choose to take no advice there would be a reduction in their charges.

The key action for firms, if not already done, would be to contact their existing clients with a valued service. This should include those with small pots who naturally may have many such portfolios.

Alistair Cunningham is financial planning director at Wingate Financial Planning

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. How do we measure a valued service then?

    A phone call?
    A lift to the shops?
    Sending our monthly news letter?

    I assuming there is a magic money tree in your word that pays for all the administration you want ‘forced’ on providers?

    Or will the trail be used to fund this?

  2. Alastair,

    I have no problem with charging fees for advice. It was my practice to do so long before the ill considered introduction of the cathartic RDR.

    The difference pre 2013 was that the structure of product providers delivery involved a cost to get to market which included commission to IFAs.

    Hence my fully disclosed remuneration was £X initial fee, maximum 4.5% but invariably much less, was facilitated by some of the marketing cost paid by the provider. Usually the client benefitted from a reduction in initial charges, and for 10 years our use of platforms added significantly to the client overall cost benefit.

    We also required a maintenance fee for ongoing monitoring and to cover annual reviews etc. This was between 0.25% and 0.9% of the funds held under review, paid for by platform charges or provider commission payment. This was also disclosed in full to all clients.

    Why the hell should a longstanding commercial agreement be torn apart by a meddling and confused regulator. In my case we have tens of millions of pounds under management and this generates a significant proportion of our income.

    My business model has been running since 1996. You want to blow up a practice with no upheld complaints, a 99% client retention rate and no consumer detriment.

    Why?

  3. Mr Cunningham

    You are, in my opinion, an idiot for a few reasons.

    No 1 – The FCA does not have the legal power to tell providers what to charge or put a cap on their product charges or how they should allocate these charges.

    No 2 – Even if the FCA do set a sunset clause
    they do not have the powers to instruct providers to rebate the “turned off trail” back into the product.

    No 3 Imagine for one moment that the FCA do set the sunset clause, there is more chance of Quasimodo getting a love bite on his hump from Esmeralda than the providers actually rebating this into the policies. They will simply hit the off button and keep it all. See Friends Life recent Statement and Standard Life prior to that. In reality all that will happen is that clients will pay the same as before but then pay more for future advice. Your thought of the providers having to do anything only for 100% client benefit is a very nice thought, pathetically naive, but a nice thought. If you think anything else other than the providers keeping the trail is likely to happen in the real world, you are truly delusional
    No 4 – Your attitude towards the law is very worrying. The law exists for a reason – to protect people and for you to say it is a moot point concerns me greatly. As it is this that keeps us a civilised nation, the law should be paramount in all circumstances.
    Apart from these 4 “moot points” it was a good article

  4. To Alastair

    Where and when has the FCA “suggested the termination of trail commission”?

  5. I guess Wingate has no trail to speak of?

  6. “Commission is a contractual right seems moot”?

    “Rules change”.

    Er, no. The laws of Contract and Tort have barely changed in 200 years.

    “Opinions” and even “moral views” aren’t what can affect the future of trail commission..the only thing that matters is the legal position.

    You can’t have the FSA overturning the a legal contract…it would be overturned by any court in the land, and would fall foul of EU law also.

    A pointless article.

  7. The payment of commission is subject to the Terms of Business between the provider and the firm. That is the agreement and therefore the law will interpret those ToBs. Examine a few provider ToBs and you will find that they are similar. Commission (trail) can be turned off because the firm has gone bust, the firm has lost its permissions, the FSA instructs the provider to stop paying it or the firm decides to stop paying it.

  8. What a poorly written article. I found myself having to constantly re-read paragraphs and as for the sentence;… ‘For those clients where advisers chose to be paid 3 per cent initial commission and 0.5 per cent ongoing, would it (have) been justifiable to take 7 or 8 per cent upfront?’….Where the dickens are you going with that? Do you actually understand how this system worked?

    The impact upon the customer was the same, that is, the product charges were the same, it was only the commission ‘shape/menu’ that was different, so justifiable or not, the result for the customer is, well, THE SAME!! Only a physical rebate or commission give-up changed the product charging structure or allocation on life and pensions products.

    Jeesh, the naivity demonstrated within your suggestions is breathtaking and you would be better advised to stick with subject matter that you fully understand; this isn’t it!

  9. The FCA should introduce euthanasia in all departments

  10. No. Come 2015, each Life Company should write to investors along the following lines: –

    “It has come to our attention that it is now 2015, not 1975, and we are therefore organising an orderly windup of our book of all lump sum and paid up ‘policies’.

    “Your existing policy has a value of £x and is Y years old. It can now be placed with a modern platform provider [insert format]. Our default provider is [z], but if you have not had a review of your finances recently, you should [speak to your adviser Mr X]/[call IFA promotions]. Thank you, good bye, and apologies for everything we’ve done to you and your adviser over the years.”

    That should do it.

  11. This is just another blow to the adviser. We’re the punchbag for the FCA/FSA, providers.

    I bought a business from a retiring business man last year. He sold ISA’s, pensions directly to the public, no advice, direct offer, discount commission rates. I paid 3 x recurring income for it.

    How in the world could it be right/fair that the FCA will now sunset me out of my investment? The clients/customers would be no better or worse off, they did not want advice or ongoing service.

    Not sure I want to be doing business in this absurd environment anymore.

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