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
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 firstname.lastname@example.org