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Cautionary trail

A few months ago, I wrote a critical comment column regarding the practice of one intermediary business continuing to receive trail commission for clients it had acquired through its takeover of other firms in previous years.

What particularly surprised me about the column was the huge correspondence it engendered. About 30 readers went online to add comments that were, from memory, split 50-50 between broadly supportive and vaguely hostile. Dozens more emailed me personally, rang and even texted.

What was fairly clear about the general tone of the replies was that what determined people’s reaction towards the original IFA business I was writing about was pure antipathy. In other words, it was not its business practices that rankled but the way it promoted itself as being different to other IFAs.

In the past week or so, this has become abundantly clear, particularly in light of reaction to the pronouncement by FSA director of conduct policy Sheila Nicoll that existing trail commission will continue to 2012.

As a matter of fact, Nicoll appears to go further than that. I may be misunderstanding her position, and if so would welcome her clarification of what she actually means, but her remarks, published in full in Money Marketing last week, appear to suggest that trail commission earned prior to the end of 2012 can continue to be taken thereafter.

Nicoll said: “If, at the end of 2012, an adviser firm has a right to receive trail commission, we will not be seeking to interfere with that. And if, for example, an advisory business is sold, our new rules will not prevent entitlements to trail commission from being transferred to the new firm.
“Of course, after 2012, it will not be possible to generate new trail commission entitlements and, over time, trail commission will peter out altogether in the investment market.”

Nicoll justifies this stance by arguing that, over time, trail commission will disappear – or it will have to form part of an agreed package of remuneration paid by a client in return for a range of ongoing annual services.

What we will see is a continuation of the same old practices – ’I take your money but do nothing to earn it’ – that have bedevilled the industry
for decades

Personally, I think this is optimistic and my own view as an IFA-watcher for almost 20 years is that it is highly likely any advisers with their wits about them will be able to persuade their client that trail is essential to the service they provide.

Not that I have any argument with that as I actually want to see clients and advisers engage with each other on a continual basis, with advisers constantly demonstrating their skills in return for a regular payment.

I also accept entirely that existing investments and other policies require review and updating and that clients should be willing to pay for this to happen.

Trail, by and large, is a convenient and not particularly expensive mechanism for this.

The real issue, therefore, is not trail payments in and of themselves but whether or not they are consensual.

It is here I fear the FSA has missed a trick. By allowing existing trail to continue to be paid, the regulator has basically ringfenced a vast amount of money, probably running into billions of pounds, that will continue to be handed over by providers to IFAs for decades to come.

Again, there is no problem here – as long as clients know what it is being paid for and approve of that payment. All my experience of talking to many thousands of IFA clients over the years is that the vast majority do not really understand what trail is all about.

Which is why, in my wildest and most optimistic – some would probably add naive – moments, I had hoped the regulator’s stance on trail payments after 2012 might mean advisers would be required to talk to their clients about the existing payments they receive.

For me, that would have been a fantastic experience – advisers having to work out exactly what they proposed to offer their clients in return for being allowed to keep receiving trail commission. That money could have formed the basis for the kind of mass re-engagement between IFAs and clients I referred to earlier.

None of that will now happen. Instead, what we will see is a continuation of the same old practices – “I take your money but do nothing to earn it” – that have bedevilled the industry for decades.

Unless, of course, some smart IFAs come up with business plans where they grab their rivals’ trail by offering much higher service levels.
There are already firms out there that do this (Hargreaves Lansdown springs to mind). By refusing to intervene in the long-running scandal of unearned trail commission on policies and investments started before December 2012 the FSA has ensured the battle over this money will intensify after the RDR deadline.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Julian Stebvens 10th June 2010 at 2:52 pm

    “a continuation of the same old practices – ‘I take your money but do nothing to earn it.’ ” Towry Law springs swiftly to mind.

    As for the assumption that the status quo is for all IFA’s to take the trail but do nothing for it, I think Nic is somewhat out of touch with the way of the IFA world these days (having never been an IFA himself, as far as I’m aware). Times have changed and IFA’s are ever more keenly aware of the need to maintain regular contact with their clients to prevent them being poached away by a rival.

    Please don’t tar us all with the same sweeping assumption that our modus operandi is to rake in as much money as possible in return for as little service as possible.

  2. Usual stuff from Cicutti 10th June 2010 at 3:53 pm

    Same old banal Cicutti journalism – take an antagonistic line in order to gain maximum IFA response. Nick you former “public sector” colours are showing red!

  3. What “same old practices” are they Nic? No doubt the cheque from Hargreaves is in the post!

  4. Robert Donaldson 10th June 2010 at 5:59 pm

    Same old same old. You can;’t change an industry overnight and you should give those that are making changes some credit. I can tell you a lot of accountancy practices and solicitors that do little for their money.

    Most advisor and particularly under the TCF rules earn that 0.5%. In fact sometime 0.5% of a £10,200 ISA does not pay for the paperwork that has to be done or the review meeting for that ISA. Hence advisors are now chasing clients with more money so that they actually make a profit.

    Whilst I respect your journalistic licence, it does become a bit boring when you constantly bash advisors.

    Spend a few days with an advisor and they will show you how they earn their money.

  5. Dennis Burling ACII APFS, Chartered Finalcial Plan 10th June 2010 at 8:50 pm

    So Nick, you are happy for the FSA to take away all of the value built up by prudent advisers building value for their future, not having taken huge up front commissions are you?? If this had been removed, this would have hit the whole future of the advice sector and would have seen a mass exodus of advisers in disgust.

    There is also of course thecrucial issue of VAT on fees – would you prefer that we cover our advice costs via VAT free trail commissions or instead bill the client 17.5% more and not take any ?? How is abolishing commission taken by an ethical, professional adviser in any way in the clients best interest – you tell me ???

    As with the other comments submitted , you simply have no idea of what is best for the client having never done the job.

  6. I have always thought that “trail” was a payment to support an ongoing client service. I can’t support the argument that it is a deferred intial payment but I respect those who feel that way as long as it is properly disclosed to their client.

    By the way enjoy the fun of convincing the dinosaur product providers to take policies out of your agency and stop paying you trail commission when you no longer service a client and watch how they struggle with such a concept

    I’m not sure I agree with the point that Dennis has made because whilst commission is being abolished the RDR is not about replacing it with fees. It never has been. It is about replacing commission determined by a product provider with adviser charging agreed between the client and the adviser with adviser charging still payable from the product and thus VAT should not apply.

    Adviser charging is pretty clear (it isn’t charging fees) in the policy statement from the FSA I just wonder why IFAs continue to claim it is about clients paying fees?

  7. John Blackmore 15th June 2010 at 6:04 pm

    @Nick

    For many years my TOB included the phrase ” Once we have acted upon your instructions we will not normally give you further advice.”
    Commission terms were typically 0 Initial + 0.5% pa trail.

    Now the FSA have decided that from Jan 1 2013 receipt of trail without service is not allowed. Although I disagree with this I have no problem with being required to change my business model BUT I am fed up with people like Nic trying to put my previously earned income at risk. I did not offer nor promise any ongoing advice – why should I not be allowed to receive my trail as per the contracts agreed with clients ?

  8. I agree with Nick Bamford’s comments on VAT and adviser charging above.
    I disagree with his perception of trail as it is just that as far as a provider is concerned, btu what is agreed between the client and adviser may be that it IS for ongoing work (which is the case with us as a firm). The trail as Nick says cannot be turned off however and will not be rebated to the client should they choose to stop using our services (with the FOS not honouring the longstop, something has got to pay for infinite file storage and legal defence costs after all), but they have the right to appoint another agent who can then receive the trail for the service provided.
    With regard donosaur product provders I know what Nick means as we have tried to get providers to remove us as agents on plans for GPP members who have left the employer, but they just can’t do it they tell us…. We have no contractural relationship with the former employee so we’ve pointed out to the insurer that they need to send everything direct to the former employee as we will not forward anything as we’re not even paid for the postage…

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