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