View more on these topics

Chris Davies: The sun is setting on trail commission

Chris-Davies-MM-Peach-400.png

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: 

  1. 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.
  2. New business: Post December 2012 a move to explicit charging included a ban on cash rebates.
  3. 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:

  1. 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. 
  2. 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.
  3. 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.
  4. 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.

legacy

Recommended

Older-Old-Couple-Pension-Pensioners-Elderly-700.jpg
11

Experts warn of pensions ‘car crash’ next year from low guidance take-up

Experts are warning next year’s reforms to pension freedoms could be a “car crash” unless take-up of pensions guidance is much higher. Earlier today Money Marketing revealed Legal & General’s pilot of pensions guidance, in conjunction with The Pensions Advisory Service and LEBC, has seen take-up of just 2.5 per cent. Writing to 9,000 customers […]

Technology-Binary-Data-Tech-Code-700.jpg
3

IFDL sales director exits for sunset clause-tackling venture

IFDL institutional sales director Rob Beverley has left the platform provider to join newly launched marketing and technology firm Sentinel alongside Succession co-founder Andrew Smith. The firm aims to assist advisers and platforms in moving clients onto an adviser charging model prior to the imposition of the sunset clause on legacy fund manager payments to […]

Nick-Clegg-LibDem-fields-a-question-2013.jpg
3

Clegg vows to increase CGT to 35%

Deputy Prime Minister Nick Clegg says he will increase capital gains tax to 35 per cent and lower the tax-free allowance to £2,500 if the Liberal Democrats are part of the next Government. The Guardian reports that Clegg, speaking at the Liberal Democrat conference in Glasgow yesterday, said a further crackdown on tax avoidance and […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

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

  1. A very worthy article well explained. However it misses two points.

    In removing Trail commission – and yes it will all go – the regulator has removed £8.7 billion in IFA practice values. rendering many businesses valueless.

    The Heath Report has also shown that a third of the present advisers with 9m consumers are in danger of losing their businesses as this impacts particularly on transactional IFA who may have serviced less wealthy clients

    What I cannot understand is that so many directly authorised IFAs seem to be in a coma.

    The regulator steals your major source of capital and you do nothing!

    See http://theheathreport.com/ and get involved

    Do the survey and do some funding

    We can win this one

    GJH

  2. Yes trail commission will disappear but £8.7bn is not being removed, most, of it is being replaced by on going service fees. Yes, there will be an advice gap for those less affluent clients, having said that, there are more and more online innovative options available to advisers and their less wealthy clients.

  3. For many businesses the issue is neither removal nor chnge of collection methods, it’s the introduction of transparency for many that will be the real issue. This will impact most on those who supposedly delivered free advice.
    It can’t be long till renewal suffers the same fate.

  4. @ Gaynor You only can transfer the value from Trail to service fees if your clients are willing to make that transfer and those clients in heritage products can be transferred without detriment..Trail derived from immovable heritage product holders will be a dead loss value wise.

    My research identifies 11,000 of a total of 33,000 advisers who have not top sliced their client banks. They are the Transactional IFAs whose clients we likely to be at a lower financial level than the New Model Advisers. They are highly dependent on Trail commission. If they leave there will be far fewer to share the FSCS and other regulatory burden.

    Whilst there is no shortage of hype about new advice structures but very little evidence that they are on the ground ready to pick up the 8m consumers who have already lost their adviser.

    Perhaps that is because they do not trust the FCA to change its mind on simplified advice or look at trail commission which was encouraged by the regulator and wonder what else the social engineers at the FCA will want to tinker with in the future.

Leave a comment