The so-called April 2016 sunset clause on trail commission looms. The banning of payments between fund managers and platforms and cash rebates and the effect on legacy products has so far escaped real scrutiny probably due to the fact that it is 18 months away. Yet the effects this can have are huge for advice firms and platforms alike.
Preparing businesses for the inevitable eradication of trail commission is one of the recurring issues that is a cause for concern in our market research. For example, one in three advice firms are not confident in managing this issue. This marks a 10 per cent drop in confidence in dealing with legacy business since April 2013.
What is clear is control and ownership of such remunerative issues needs to be taken now if advice firms and platforms are to embrace the world of transparency and clean charging.
To do so we need to return to old ground and define the issues at play:
- Legacy trail: Firms can continue to receive trail on pre December 2012 products as long as there are no events (triggers) that will mean a switch to the new rules. However, this business will be required to move away from rebates in 2016. Thus, with the move to adviser and clean share charging, trail commission will be eradicated (rather than turned off by the regulator) over time.
- New business: Post December 2012 a move to explicit charging included a ban on cash rebates.
- Unit rebating can remain but this has tax implications.
It is also helpful to know what is in scope and out of scope.
In scope: Platforms and all business written post December 2012.
Out of scope: Isas, Investment and with profit bonds, OEICs, insurance policies, mortgage and protection business.
At the centre of all this is the client. So a focus on client centricity now needs to be a key business strategy to start to address this issue and ensure good outcomes for all stakeholders.
A good place to start is the terms of business or agency agreements adviser firms have with product providers. It is clear providers will not think twice about stopping legacy trail where they find it appropriate, so adviser firms now need to address their client agreements and client needs to ensure adviser charging is fully incorporated into their business model. There are some key strategies that can be used:
- Client charging engagement: Explicit charging is now the key, by moving to direct charges and showcasing this charging structure in client agreements with cost benefit examples, will allow clients to assess the benefit and ongoing value they will receive.
- Client service proposition: This needs to be clear and concise and offer clients value. By understanding the legacy trail issue, firms can assess which clients are best to be moved to adviser charging and those that may remain in the older regime and removed from advised services. By marketing their transparent charging service, adviser firms will be able to showcase high value and attract client loyalty and more of the right clients to the business.
- Client segmentation: By dovetailing what clients need and want and what the firm offers, there will be a natural positioning of services to fit client requirements. This will address the legacy issue head on by ensuring those clients who require pro-active services will all be placed in the adviser-charging regime.
- Regulation and compliance: By moving clients over to adviser charging thus incorporating the clean platform charging structure, adviser firms and their clients will be able to compare the costs of investing and ensure product bias plays no part in the decision making process. In essence, adviser firms will be walking their talk on service support and suitability of advice should then be a natural by-product.
For platforms, it will be those who embrace adviser support strategies though new enabler technologies and client engagement (for example by applying the treating customers fairly and client best interest rule) on charge transparency and value of service who will facilitate a good customer experience and sustainable models.
Our diagram below illustrates examples for how the adviser charging and platform charging structure has changed. Our preference is for model one, where new clean share classes become the norm, charging is clear and unit rebates and associated tax issues are avoided. This seems to be a simple and sensible solution for all stakeholders.
The sunset on legacy business can be a glorious opportunity. By addressing this issue early adviser firms and platforms can now streamline their businesses and offer tailored services that clients or customers value due to the fact they know exactly how much they are paying and what they are getting for their hard earned cash.