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BBC’s Money Box reignites trail commission debate

BBC Money Box presenter Paul Lewis
BBC Money Box presenter Paul Lewis

Trail commission has come under the spotlight again following a BBC Money Box programme which reignited the debate over whether advisers are justified in receiving ongoing commission for pre-RDR business without offering an ongoing service.

The Radio 4 broadcast at the weekend featured a listener called Michael, who had around £90,000 in investments dating back 20 years. Michael explained he had “never really been clear” if his adviser had received trail commission in respect of his policies.

Presenter Paul Lewis questioned whether clients who had taken out products before the RDR was introduced had to be informed about the trail their advisers received.

West Riding Personal Financial Solutions managing director Neil Liversidge told the programme: “If somebody took out an investment 20 years ago then I am not aware of any rule which requires the adviser to go to them now and say we are getting 0.5 per cent a year under this investment.

“In theory, the adviser could do nothing for that 0.5 per cent and keep receiving it. But most financial advisers are ethical, and will tell clients what they are getting. I know you are laughing Paul because you like to present an alternative view that is at odds with the truth. But I find it impossible to believe Michael has kept these investments going all this time and has not had any interaction with his financial adviser. If that is the case, I would question why he has stayed with his original adviser.”

Lewis then asked IFA Centre managing director Gill Cardy whether there was an incentive for advisers receiving trail to do nothing, in order to continue being paid. He said: “We spoke to one adviser this week who told us trail commission for many is money for old rope. IFAs are building their model off trail commission, building pots of millions so they can retire on trail commission of hundreds and thousands.”

Cardy explained trail can still be paid on fund switches within an insurance product, saying: “Switching can still happen. This is not a licence to do absolutely nothing and let something languish for 20 years.”

Financial website Candid Money owner Justin Modray said: “It is a perverse situation that if the adviser does rock the boat and try and look after you, having done nothing for some time, the adviser could lose out because they have to slap you with a fee. If you do not want to pay that fee, they could lose you as a client and lose the commission they would have got if they kept quiet.”

Money Box first covered the issue of trail commission in September 2011, referring to it as “one of the industry’s best kept secrets”. The programme was met with anger by many advisers, including Liversidge, who wrote an open letter to Paul Lewis on the subject and sparked an industry-wide debate.

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Comments

There are 25 comments at the moment, we would love to hear your opinion too.

  1. Nicholas Pleasure 28th January 2013 at 12:25 pm

    For providers commission was never the cost of advice – it was the cost of distribution, which is quite a different thing.

    Had the providers each opened their own “investment shops” on every High Street the cost would have been significantly higher and would have been covered by policy charges.

    Instead they chose the more cost effective model of supporting ‘brokers’ who sold their product for them. Brokers were there to find you the best pension, life insurance, investment etc,

    It was the FSA 1986 that introduced the idea of ‘financial advice’ and the commission paying the cost of that advice.

    The RDR will see the return of the direct sales force. This time they will be salaried so that their costs can be met by policy charges and not commission. However, I doubt the pressure to sell, sell, sell will be reduced.

    So Paul Lewis and his publicly funded friends will eventually get what they want. No more trail commission for IFA’s.

    They will also get high pressure direct sales forces for the masses. That’s the law of unintended consequences that has plagued every part of RDR.

    Be careful what you wish for Paul because it might just come true.

  2. Why do I have to pay my Licence Fee to fund the BBC when they keep putting repeated programmes on? Here again another repeat – just in another guise!

  3. Like any other business, a staffed office costs money and most IFA’s provide an excellent service with regular reviews and are always available to our clients. As usual the quoted adviser is not named and the usual sensationalist language used. “Money for old Rope” and “retiring on hundreds of thousands of pounds of commission”- How do you do this? You have to remain authorised to recieve monies therefore,if you’ve retired you are no longer able to recieve trail.

  4. I realise this is a sensitive area for many but my simple view is that the purpose of trail depends on what it was agreed as being for.

    I have spoken to those who see ‘trail’ as meeting the cost of ongoing advice whilst others opted to take less initial income and take trail instead and they essentially ‘deferred’ their initial commission – demonstrable by the remuneration structures previously available on onshore bonds (e.g. something like where 6% initial or 3% initial + 0.5% ‘trail’ both result in the same client charge)

    From a providers point of view, I have heard the comment made that commission is a provider expense (again, as demonstrated above).

    The key for me is that providing the client is aware it exists they can then look to ensure for what it’s being paid is being delivered.

    Many discussions seem to be polarised but in practice it’s rare things are black and white.

  5. @Nicholas Pleasure

    The RDR rules specifically prevent the payment of adviser salaries from policy charges. That’s why there hasn’t been any growth in direct sales.

    It is interesting to see the attempts of the banks and building societies (and SJP) to effectively replicate commission as charges.

    If this doesn’t work then the most likely outcome is a restricted availability of advice to anyone other than high net worth individuals willing and able to pay.

  6. Nicholas Pleasure 28th January 2013 at 2:12 pm

    @Grey Area

    Many thanks for your post. I am aware of the rule but probably didn’t express myself too well.

    The thing is that you can use policy charges to pay for administrators and actuaries and people to answer the phone. What if those advisers didn’t actually give advice – just helped people with the forms???!! No doubt that could be covered by policy charges.

    If you do want ‘advisers’ you can have them because, like you say, you just replicate commissions as fees, with the charge as part of the small print which the client signs but never reads. Just how these guys got away with big commissions.

    And if you want to charge 0.5% a year for doing nothing and you disclose it to your client who signs to agree, you can still do so.

    The RDR rules are fatally flawed and impossible to police. I suspect that in 5 years time Paul Lewis and his pals at Which? will regret attacking commission because the alternative that will replace the sound local IFA is far, far worse.

    (PS Lets not have lost of posts from smug ‘new model advisers’ with spectacular HNW client banks. You know we are discussing the middle market here)

  7. I have paid a licence fee for the last 35 years and since I also choose to pay subscriptions to Sky. I would like to turn my licence fee off as I no longer wish to take services from the BBC – Does anyone know of any other democratic society where you have to pay for something you don’t want? At least clients have the choice not to pay!

  8. Hello Girls!

    Er, let’s see now. Time for some perspective.

    1. The BBC forces us to pay a licence fee whether we watch their programmes or not (and can force us to prison if we don’t play ball in their cozy game.
    2. Trail commission was usually part of a deal which provided a reduced initial commission, usually taking six years (the average life of an investment) before the adviser was ahead of the game – so knocking out the argument that it was ‘something for nothing’.
    3. Trail commission is disclosed to clients directly in literature received every year.

    So what does all this boil down to?

    A hypocrite telling lies at the behest of an illiterate client.

    Love and kisses

    Larry xxxx

  9. If Michael invested £? twenty years ago and into a bond, there probably wasn’t any trail commission anyway. And if he hasn’t sought advice along the way, he really must be a DIY fan. To admit to not knowing for twenty years is pretty damning and, as Victor would have it, I don’t believe it.

  10. @ Larry
    Hey bro where have you been? Missed your cheerie comments!!!

  11. BBC would have been shown to be a lot more biased and that they were on the ball if they mentioned clawbacks in their discussions, too. Avoiding clawbacks is the main reason for taking trail / on the drip as opposed to up front commission. Why do I have to pay a licence fee for them to spend the funds to discredit us all as well as repeat programs on several channels.

  12. I was meant to appear on this show instead of Neil but unfortunately got replaced at the last moment. It was unfortunate because although Neil did an excellent job of getting across that trail commission or fee is not hidden, as the media like to portray, he didn’t, and nor did any of the other guests get across the point that IFA’s are like every other business and have overheads and costs. I posted this on the Linkedin group of IFA Centre and thought it would add to the debate.

    I’ve also been asked for feedback by Money Box and await a response to this:

    1. IFA’s now provide all clients with an agreed fee agreement upfront before advice is given so clients can compare charges if they wish and also the service proposition. Although this point was highlighted, I think we needed to make a bigger point about this, although I did think Gillian got this point across better.

    2. We seemed to allow Paul to concentrate on charges without any consideration to the real cost IFA’s have e.g. FSA fees and FSCS fees together with ongoing costs and liabilities of dealing with a client. After all in what other profession does the liability of advice continue well beyond the initial phase and these costs have to be covered within the charging structure.

    3. I suppose this follows on from point 2, but with the ever increasing claims management firms the cost of advice is going to remain high as advisers will have to keep reserves to deal with the potential of bogus claims.

    4. Like every other business there are other associated costs, advertising, staff costs etc so when Paul stated that an IFA could be receiving ongoing trail, as if the IFA is drawing this all as income, this is of course an incorrect analogy as this often covers ongoing overheads and other costs as above.

    These are just a few points that I think IFA’s should try to get across to the media rather than trying to hide from our charging structures. I know many of my clients are realistic and realise that an IFA has to make a living like any other trade. I could go into further detail about cross subsidy and the ethics for this but I feel that I’ve gone on enough for now, what do other people think?

  13. @ Larry in London and Anonymous –

    Excellent points very well made.

    It really frustrates me that the BBC seems so anti-IFA, when there are thousands of IFAs out there actually doing a fantastic job for clients.

    I suppose Paul Lewis has never once discussed the often overwhelming cost of running an IFA firm (regardless of size) or about the pressure on IFAs to deliver top-standard, compliant and accurate advise and information, or the fact that IFAs are liable for advise they gave even after they have already retired.

    It would be nice to have someone in the mainstream media actually fightint our corner for once, but all we ever seem to see is a huge bias against IFAs.

  14. Ever seen the sinister, threatening letters the beeb send to those who do not have a license, even when they really do not own a TV?
    The beeb can say/do what they like.
    I will watch with interest what Martin Lewis has to say when no one can access advice.

  15. I listened to this and I think the following points are valid:

    1. The listener Michael is a bit of a plonker. Why doesn’t he interact a bit more with his adviser? Odds on the investments he has are with a life office. Good chance they are in With Profits. When was this last reviewed? Why is he in a life fund (rather than say a unit or investment trust)?

    2. Paul Lewis – who is a good bloke – often falls into journalistic hyperbole, that is invariable divorced from the facts. “ …. building pots of millions so they can retire on trail commission of hundreds and thousands”. Not possible. If you are retired you are no longer authorsied. If you are no longer authorized you receive no remuneration from providers.

    3. I heard Paul mention the phrase IFA innumerable times, but he did his listeners a disservice by not pointing out that it is not an Independent that clients will automatically get going forward, nor is it necessarily a given that Michael above ever had advise from an independent. Not to explain that people could be advised by restricted advisers was, in my opinion, a grave omission. But then why let a few facts get in the way of a good story?

  16. BBC. Entwistle. £450,000 + bonuses for 54 days work.

  17. Hello Agony Mouse

    I’s bin upstairs, where’s you bin?

    Seriously,

    The BBC is a gravy train – their journos have been made rich, some of them very seriously, by the expenses system there. That’s without considerin’ what happened with Savile. THEY KNEW what was happening and they did nothing. Everyone from the DG down knew what Savile was. Everyone.

    If I am ever interviewed by the BEEB I will simply turn the tables and simply start asking them about the problems in their own house.

    Love and kisses

    Larrykins xxxx

  18. Many IFA’s are good and honest, but then many are not good and dishonest. Ive heard many an adviser talk of his retirement plant (to get a certain amount of trail running then leave on permanent holiday). Its these IFA’s that have damaged this industry. The industry has got the regulation it deserved. RDR is a means to counteract these practices and it will continue until the bad eggs are gone.

  19. Hello Matty!

    But how does your argument square with the IFA giving up perhaps 1/2 of the initial commission to get the non-guaranteed trail commission? Surely, if someone were anxious to feather their retirement nest (to the detriment of clients as you imply) they would take the biggest initial commission… ?

    Love

    Larry xxxx

  20. I would prefer 0.5% over 10 + years than 3% upfront from a monetary point of view. As long as you keep the client, you’ll make money from them, initial is purely transactional business. Thats the point these advisers were making, many of them would have £1million plus per client invested and charge no initial but a constant 1% trail.

    Why would anyone discount initial and claim it was made up by trail. Trail was there to pay to service the client, not make up your fees.

  21. One thing RDR has done is to make our firm realise how much work we have done for nothing. Trail paid by clients for whom we have done a vast array of work is insufficient. If we have failed to deliver a service to a client then sure stop the trail, if journos and regulators shut it down, we will invoice our clients for the work done and for initial contracts set up and I suppose we will be then known as fee hungry salespersons. RDR is elitist and I look forward to governments regulators and commentators crying out that no one saves any more like they did when the home service were eliminated in the early 2000s still gives Paul a job eh!!

  22. I assume Paul Lewis is on a decent wage and has some decent assets behind him, i also assume he has been through some sort of advice process in the past. It would be interesting to find out what his own IFA thought of his programme (i admit i’m making wild assumptions about his personal circumstances but that inaccuracies doesn’t stop Paul Lewis reporting so why should it stop me?).
    If he was my client i would tell him to bugger off next time he wanted a review as he clearly doesn’t appreciate what an IFA does or how we work..

  23. Obviosly Mr Lewis has never actually worked in an IFA business where a large proportion of clients actually cost the IFA more than they receive in commission but in the past this was cross subsidised by those with larger pots.

    How many clients have pots worth less than £20,000 which, based on a trail commission of 1%, would only generate £200 a year which doesnt cover the cost of servicing them.

    What RDR will do is benefit those who can afford to pay fees as any business wouldn’t continue to cross subsidise loss making clients.

  24. Can anyone point me in the direction to where in this article Paul Lewis has had such a scandalous pop at IFAs? Cant see it myself.

  25. Neil F Liversidge 30th January 2013 at 12:57 pm

    @ John C: I think the comments refer not to any article by Paul Lewis but rather to comments made by him from time to time. We exchanged fire a while back when he described trail commission as ‘secret’. If you google Liversidge v Lewis you’ll find it all online.

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