The New Year has brought advisers another step closer to the end of trail commission paid on platform business and corporate pensions in April 2016.
The changes are intended to provide greater transparency for consumers and mean platform charges must be agreed directly with clients, fund manager rebates must be passed on to clients as taxable unit rebates or clients must be moved into rebate-free clean share classes. The changes effectively stop trail for advisers, as the revenue from rebates will not be around to fund it.
Few would argue against the FCA’s aim of greater transparency. However, many believe the so-called “sunset clause”, which gives providers and advisers until 6 April 2016 to implement the changes, is going to bring about some unintended consequences for advice firms, particularly smaller ones, which will ultimately be detrimental to clients.
Panacea founder and chief executive Derek Bradley points out that the FCA has been clear it has no intention of seeing legacy trail commission (trail paid to advisers on pre-RDR business) disappear ”by its own hand” with an outright ban. The regulator is content for legacy trail to decline over time but there is nothing to stop providers turning off all trail by April 2016 – or clients turning it off themselves.
Bradbury Hamilton managing director Sheriar Bradbury says providers are calling clients to ask when they last spoke to their advisers. “They will switch off the agency and trail if it has been a few years,” he says.
For Bradley, the implications are massive. “Last year we ran a poll on what effect the removal of trail is likely to have on advice businesses. We ran the poll again recently and the numbers show 416 respondants see it as a ’catastrophic’ issue. To put that into context, 20 see it as a ‘big’ issue, 12 see it as a ‘small’ issue and nine do not see it as an issue. These results follow the trend of the previous survey.”
If it is difficult to move clients to a fee for ongoing advice for whatever reason, not only is the loss of income a concern but also the prospect of the firm being worth less if it is to be sold, as valuations have been based on the amount of recurring income.
“Recurring income has been the bedrock of some advice firms for years. If this was to go, you wipe out the value of those advice businesses,” says Bradley.
“Ultimately the very person this has been put in place to protect – the consumer – is the person who loses out. It is a frightful irony. It will create more and more disenfranchised consumers who haven’t got access to advice unless they pay.”
However, founder and managing director of The Foundation Group Steve Hagues says that, like most things, the fear is worse than the reality.
”It is up to adviser to get their clients transferred to customer agreed remuneration. A lot of people are having some success but some are used to commission – a trail driven model – and that’s driving mergers and acquisitions.”
Hagues recognises it may be difficult for advisers to move clients to fees if they have not seen them for five or 10 years but he says networks will actually suffer the most.
”When an adviser leaves a network they take all their best clients but they will always leave some: perhaps the client has moved and not told the adviser. If that happens for all advisers coming in and out of the network, it builds up a large residual income for that network,” he says. The question for Hagues is whether the networks can hold on to this residual income.
Some advisers may not have an ongoing relationship with all clients that generate trail. Indeed, some opted for trail commission as an alternative to upfront commission pre-RDR. With no ongoing service agreement, some of these clients were transactional, so may not be obvious candidates for customer agreed remuneration, says Verbatim Asset Management sales and marketing director Dan Russell.
“The adviser would see trail as deferred payment for the work they did at the time and it could be difficult to go back to that client now,” says Russell. “However, if it is a genuine client the adviser provides with an ongoing service they would really care to be upgraded and get an enhanced service for which they pay a fee.”
So what do advisers need to do? “They have to plan,” says Russell. “Doing nothing is not an option as they will lose any income coming in through trail from platforms. When people do put in place proper projects to address this, they are not only protecting their income but growing it as well. When engaging with a transactional client they may find what they initially advised on has grown or the client’s financial circumstances have changed. When they align the ongoing service with client needs, for which they discuss a discreet fee, it opens up a client relationship.”