A few weeks ago Money Marketing published an article by Gordon McNeill which did an excellent job of exposing the truth about trail commission and the mentality of insurance providers.
As McNeill states “The right to trail never included any undertaking to provide an ongoing service”, yet some sections of the profession have been quick to state that trail is a de facto payment for ongoing service. No it is not. Nowhere in my very old scanned copies of agency agreements was this confirmed.
In 1998, like a small number of advisory firms, I chose to take a reduced initial commission of 3 per cent plus 0.5 per cent pa trail rather than full initial commission of 5 per cent while the majority of firms took as much initial commission as they could get.
Why did I do this and not take all the money up front?
I took the long term view. I wanted to build a business built on a sustainable model of recurring income.
The decision to take reduced initial plus trail was a contractual arrangement between adviser and provider and has nothing to do with the client – the client pays the same charges for their product irrespective of the shape of commission paid to the adviser.
Those who oppose this view may feel that the adviser is getting paid trail without doing anything for the money and that this is unfair/wrong. I disagree – the adviser is getting paid trail because he made a painful and difficult decision to take less money while others were grasping at the maximum initial commission available to them – he made a smart long term decision and is now enjoying the rewards.
Trail is the smart adviser’s dividend on his prior good business decision to build a business rather than take a short term view.
Of course, one needs to provide service to keep clients happy and to remain engaged – if clients don’t feel cared for/looked after then they will seek out another adviser. So, advisers who offer no service is likely to see clients leave for pastures new.
However, advisers who sought to build a business (by building trail income) are the very firms who are most likely to be focussed on client service and building long term relationships – unlike the policy floggers who took maximum initial commission at every opportunity.
The “trail for service” advocates have won the day and this is now the landscape we inhabit. Not because trail commission is a service related payment – but because the public sensibilities are uppermost in the regulators mind.
It is offensive to many that adviser firms, which have sacrificed to build trail over many years, are getting trail income for doing nothing. Unfortunately, none of the bodies representing advisers made a strong enough stand to oppose this assault on advisers income.
It is clear that providers will seek to turn off trail wherever they can. They will keep the plan charges to the client the same and “pocket” the advisers trail. They know that small IFA firms do not have the money/resource to fight them individually.
The writing is on the wall for trail and those firms who have built significant trail income are at risk.
Fortunately, Skandia Multifunds did us the biggest favour in 2005, when they decided to reduce our trail commission unilaterally – no discussion, no exemption – they just did it and our income was slashed by thousands of pounds each year .
Skandia had been regarded as a strong supporter of the IFA and I thought “if Skandia can do this, anyone can”.
Product providers cannot be trusted to act honourably in their dealings with IFAs and the only way to guarantee your firm’s income is to not have the provider control the payment of your income – your income is a matter between you and your client.
Thank god for wrap platforms.
Carl Melvin is managing director at Affluent Financial Planning