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Cast adrift: Two years on, has the sunset clause left clients orphaned?

Two years on from the sunset clause, advisers remain concerned over client poaching and how platforms deal with clients they have deemed “financial orphans.”

The FCA banned platforms from retaining rebates from fund managers in 2014, but allowed the payment of commission to advisers to continue. The introduction of the sunset clause in April 2016 then saw the end of trail commission for advised platform businesses.

Advisers were left to reconsider whether it was worth servicing clients with low-value pots or simple needs, and whether they could justify an adviser fee for services to them.

For the orphaned clients lost from this, experts say platforms are just following their legal obligation by picking them up, but have benefited from taking on those left unadvised nonetheless.

Money Marketing approached a number of platforms for  their policies on contacting end investors to see what impact the sunset clause has had on the number of orphaned clients in the sector.

Poaching pressure

Clients can become orphaned for many reasons. They could be those whose adviser has passed away or gone out of business, or those who have actively contacted a provider after sacking their adviser. Other less-frequent instances include clients lost by administrative errors in platform mergers or upgrades.

Lang Cat consulting director Mike Barrett says: “Post-RDR clients are perfectly in their rights to sack an adviser and turn off adviser charging, but platforms get into difficult territory if they start to assume the relationship that an adviser has with a client.”

He adds: “The sunset clause by definition shook the tree and platforms were writing out to clients and getting them to reconfirm the client/adviser relationship or if nothing was happening.”

While platforms have increasingly been asking clients to confirm the regularity of contact with their adviser, Barrett says communication between the advisers and platform providers is the cause of most poaching problems.

Editor’s note: Orphaned clients are safe… for now

Aegon, which looked at developing an online direct-to-consumer proposition for orphaned clients in 2013, has been the centre of a few complaints for picking up clients in the wake of the sunset clause.

The firm said it makes its online service available for advisers to refer those clients who they decided they no longer want to serve because of a lack of legacy products that attract commission.

A Sussex-based IFA approached Money Marketing in November to say Aegon had been removing clients from his agency, confirming this week that Aegon had contacted clients to say they were being serviced by the provider when they were not.

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Of the IFA’s previously 400-strong client base, he says 83 were poached in this way.

An Aegon spokesperson tells Money Marketing the client was likely contacted to be offered a new pension deal, but that only inactive, non-commission paying clients are approached.

He says: “We will offer them the option to upgrade to a digital pension after applying a comprehensive test.”

Norwood Financial Services partner David Frost blames poor communication from providers leaving advisers no choice but to stop servicing some clients.

Frost contacted Money Marketing earlier this year after Aviva Investors’ decision to cut trail commission on its remaining products by the end of June and replace it with a flat fee.

Adviser view

Philip Martin, co-director, Unique Financial Planning

Nobody owns clients and they are free to do whatever they want. If an adviser doesn’t value clients, the clients will also not value the relationship and therefore not consider themselves aligned. Orphaned clients are people who were sold to 10-15 years ago and then never contacted again and that isn’t a deep relationship. An adviser should not assume they have any sort of right to be the only professional individual who can ever speak with that person. There are platforms using that to their advantage to propel their own assets under management. No one owns a client, so they are free to be anywhere.

Frost says: “I do not recall anything that allows Aviva to reduce our remuneration without us giving our consent. This seems like a breach of our contract in the making.”

In a letter from Frost to Aviva, he argues advisers using Aviva had not been warned of changes to their situations by platforms ahead of clients being contacted. Frost also denies Aviva’s claims that clients will be serviced better without trail-commissioned products.

Arguably, establishing whether or not a client is orphaned when trail is not being paid is difficult; so long as a customer-agreed remuneration stays in place, platforms are often continuing to pay out.

Platform number crunching

Despite speculation that Cofunds’ number of orphan clients would increase in light of the sunset clause, a spokesperson for the platform says it has remained stable and represent less than 1 per cent of users.

Of Cofunds’ 400,000 clients, it estimates 2,000 are financial orphans. The latest figure is higher than the 0.3 per cent quoted to Money Marketing in September 2016, but is only an increase of 0.2 percentage points.

A Cofunds spokesman says there is no internal policy in place for contacting any back-end investors beyond providing them with regular information on their holdings.

Old Mutual Wealth did not provide an exact figure of orphaned clients on the platform, but notes new investors can only come on board if currently receiving advice from a financial adviser.

Back-end investors on OMW receive help with the management of their investments online via its customer service centre.

However, it is unclear whether these clients are therefore included in the company’s count of orphaned clients for statistical purposes, as they still receive some level of support.

An OMW spokesman says: “Where the relationship between the client and financial adviser has ceased and the client has elected not to re-engage an adviser, we ensure the client receives appropriate services to enable them to manage their investments. The customer service allows customers to top up their accounts into their existing fund choice only, open a new Isa or collective investment account and switch funds.”

The spokesman says OMW has a policy in place to contact clients that have been identified as non-advised immediately, first setting out the benefits of having a financial adviser, and then with options to be serviced exclusively by OMW in the meantime.

Adviser view

Mark Meldon, financial adviser, Meldon & Co Ltd

An orphaned client is anyone on an adviser’s book of contacts who is not being regularly serviced. There are certainly plenty of orphaned clients out there in the market and with regulation like GDPR coming into play, the adviser needs to make sure they are in regular contact and fulfilling their obligations of service to their whole book of clients.

If you take a large provider like Aviva, for example, any of its clients who were originally introduced to it by an intermediary but are no longer receiving direct advice or guidance must be considered within that category also.

Barrett says while some advisers still feel their clients are at risk of being poached, the majority do not.

If clients understand the value of the service they are receiving and advisers accurately explain the benefits of advice over the course of a lifetime, Barrett says clients are usually only orphaned by choice or unusual circumstances.

He says: “Advisers will also be talking about the wider services they are providing like tax planning, family planning, inter-generational planning and drawing the added value they will be getting across their life, not just what’s on the platform. The only way advisers are paid and clients are not orphaned is by convincing them you can offer something of value that they will give you a fee for.”

Fidelity Funds Network told Money Marketing it had not seen a material increase in orphan clients when approached at the time of the clause implementation.

Two years on, a spokesman says the company now no longer considers itself to have any orphan clients as all of its platform investors have an intermediary or adviser “associated” with them.

Despite this, the spokesman confirms it is Fidelity’s policy to encourage any orphaned clients to seek a new adviser, regardless of circumstance.

He says: “Where an adviser and a client part company, we ask the client to find a new adviser or an intermediary. This approach has been in place for many years.”

How much communication?

Barrett says platforms often justify making contact with clients because they might assume some advisers who receive commission are not providing adequate service.

He says: “Trail commission is still paid out to advisers to allow them to facilitate servicing, especially investment bonds, and it could well be the adviser is giving a fantastic service to the client and seeing them regularly.”

He adds: “It’s hard to make that judgement when you’re a provider; just because something is an old product and happens to have been paying trail commission for 10 years that doesn’t mean there isn’t a strong relationship between a client and an adviser.”

While advisers must contact clients yearly under Mifid II requirements, some say a client should not be considered to be out of regular contact with an adviser until the relationship has had no contact for five to 10 years. A March 2016 FCA review says a client becomes an orphan when they have had no professional contact with their adviser for three years.

Barrett says platforms also make the mistake of assuming all clients want regular contact with their adviser.

He says: “It varies on the type of client and they should be the one to understand what suits them and what suits their needs. Advisers should have the flexibility to decide as well because it’s about building a genuinely client-centric proposition, rather than pushing them into a box based on their level of assets.”

Moving forward, Barrett says a wider sunset clause on all trail commission would be a more solid indicator of how many clients will be left fending for themselves and how providers will go about servicing them.

He says: “The sunset clause now only covers platform products but there is still a lot more where it’s sat in legacy bonds and pensions and it will be questioned whether advisers are doing enough in those spaces to warrant that commission.

“This will be quite disruptive and is something for advisers to keep their eyes on.”

Expert view

Platforms and advisers can work together over orphans

The platform needs to communicate with the adviser, but the adviser also needs to communicate with the platform.

Whether there’s regulatory change or technological change, that communication needs to happen so you can’t point the finger at either side. I don’t believe any platform would ever just poach customers; that’s not what’s happening and it’s a misunderstanding in many cases.

If a customer is looking for a service and they haven’t had contact from their adviser for a while, they will naturally migrate towards a platform. If that platform has a specific offering it can provide, it has an obligation to do that. For the money, a platform has to provide a service.  Platforms need a decent customer portal for customers to use. Aegon, for example, created a new platform to allow customers to do things more easily.

There are a few bigger-name companies which have been around a long time and if those platforms feel they need to take control of a customer and offer them a service for regulatory reasons, they need to be clearly communicating that with the advisers. Advisers also need to realise that if there is a regulatory obligation for platforms and if they are not providing an ongoing service at least once a year, then customers may opt to go direct to the platform.

A customer might also migrate to a platform because that’s where they are used to logging on to see things. If an adviser wants to provide a service for their customers that they can’t see every six to 12 months, they might want to look into providing a home service or setting up a simple white label service.

If the adviser can provide those services, they will be able to keep customers. Until they do, customers will keep migrating towards platforms.

Ben Hammond is senior consultant at Altus Consulting 

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. The key question, with hindsight, is what net benefit was achieved as a result of the sunset clause?

    From our point of view, we had to absorb significant costs and complications – particularly when ‘topping up’ existing pre-sunset accounts.

    Furthermore, some accounts could not be topped up – resulting in additional advice points which would otherwise not be required – potentially increasing the cost to the client.

    I’m still yet to be convinced the cost to invest has fallen post RDR/Sunset clause and I suspect it is higher.

    On an aside, we’ve also had cases where a client (post RDR) has effectively paid twice for a service given that pension contracts may have offered commission when arranging an annuity (presumably priced into the AMC) but RDR banned that commission and it was absorbed by the life company – necessitating a fee to the client!

    Hardly an intended outcome I presume.

  2. Robert Milligan 24th May 2018 at 3:47 pm

    having been giving investment advice for the past thirty years, I can not recall regulation requiring me to inform the Platform, Investment manager nor indeed the Product Provider I have revived with the client the suitability of retaining the investment, What is going on is the three above are reconsolidating the products onto new platforms or policy numbers and removing the IFA authority, this is a disgraceful abuse of position and I think almost theft of data. In fact it could post RDR incur the client with additional costs as it seems we should be informing the providers with a copy of our client updates,

  3. MIFID II has not helped either…. Same problem in that clients with low levels of investments only require a review every 18 months or so which is incompatible with MIFID II.

  4. Patrick Schan 27th May 2018 at 1:01 pm

    “Orphaned clients are people who were sold to 10-15 years ago and then never contacted again”

    I wish people would not make sweeping statements like this Philip. In many cases it is simply not true. It is just your opinion, which can’t be proven either way.

    I cannot think of a single, major improvement that the RDR and sunset clause has provided for the public, as I (among many others) stated, years ago, would be the case.

    For clients, that I have had to put on a fee basis, there has been an inevitable increase in cost due to the extra work level. Not a good outcome and one I would rather not have faced.

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