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Cicutti: IFAs must take blame for trail troubles

Here is a riddle for you. Question, what’s even bigger than the total number of IFA clients? Answer: the total number of IFAs’ ex-customers. Oh and by the way, the use of the word “customer” is deliberate.

Jokes aside, one of the most staggering omissions of all the discussion about the consequences of the RDR is not so much the impact it might have on consumers’ future ability to access independent advice but the fact that, given the choice, so few are currently prepared to remain as clients of their IFAs today.

Which is why I find unconvincing the current opprobrium being heaped on Standard Life for its free iPad competition, asking those who hold one or more of its investments whether they still have a “live” IFA attending to their needs to say so.

I suspect that if it carried out its work properly, making not just an iPad available but simply calling every one of its customers and asking a few questions, Standard would unearth a massive number of orphans as opposed to continuing clients.

Let me be clear. By “client”, I do not mean someone you might once have sold an investment to 15 years ago but would not recognise if you bumped into them while doing the Christmas shopping in Tesco.

My definition implies a sustained and – eventually – long-term relationship between IFA and client, consisting of at least once-yearly financial reviews and appropriate decision-making based on advice given on more than one issue – and requiring more than a one-off product sale.

If you accept this definition even minimally, what is shocking is how relatively small the number of genuine clients is compared with the far bigger number of those who could be but are not.

Just to give an example, an entirely subjective one: almost half of my acquaintances, people I mix with socially or professionally, have come into contact with an IFA at some stage in their working lives or since giving up work.

That is not to say they necessarily then followed through initial contact or, if they did, it remained a one-off transaction – of which more later. And, to be sure, we are talking about a relatively middle-class bunch of people. But I suspect that, in similar circles, most people have either accessed an IFA or strongly considered doing so.

What has gone wrong? How can it be that millions of people have slipped so easily through the fingers of IFAs in the past 15 or 20 years? I believe the main reason is that for too long the relationship between IFAs and their clients has been directly transactional, as already referred to. In saying this, I am not necessarily blaming advisers for this.

Over the years, it has become all too common-place for consumers to approach advisers with a specific problem, which they assume is resolvable in isolation. For example, a mortgage decision or a pension that needs setting up. Once the issue is sorted, the client disappears – either until the next time or never to be seen again.

Yet advisers too need to accept that the relationship they entered into with their clients over many years has been highly dysfunctional too. Primarily, it has been predicated on a “solution” that involved product sales as the key way of proving one’s expertise. Moreover, the IFA was paid not so much for his overall talent and skill as a financial planner but for his or her broking abilities and product selection. And providers have then colluded in the peculiar shaping of this relationship by ensuring that it was the act of sale that was rewarded, as indeed they had to in order to boost their bottom line.

To cap it all, from an IFAs’ point of view, it barely matters if the transaction remains a single one and is not sticky – that is, it does not lead to further work with that client. That is because as long as the client stays with the product for a relatively limited period of a few years, commission clawback is relatively minimal.

Even more important, an IFA has the potential to earn increasingly vast amounts of money from all the people he or she sold to without lifting a finger ever again.
That is the beauty of trail – and it is hardly an accident that by far the most vociferous defence of trail comes from those who are disinclined to lift a finger to earn it.

To return to Standard Life’s attempts to identify customers who no longer deal with their adviser, what is wrong with its approach is not so much its attempt to cut trail payments to the IFA but its refusal to rebate the commission back to the client.

If Standard Life is not going to service the client, and I cannot for the life of me imagine how it could do that, then the company’s attempt to halt trail payments is not fair.

But the responsibility for this happening lies not with consumers, who stand to gain nothing, or with Standard Life alone but also with all those IFAs who allowed it to happen in the first place over the years.

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

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Comments

There are 28 comments at the moment, we would love to hear your opinion too.

  1. Well said, Nic.

    Keep in mind that there are lots of IFAs out there who view trail commission as some kind of deferred initial payment – a strange view of the world.

    It’s funny how clients who receive a regular ongoing service never fall victim to the occasional direct approach from life offices. Why would they?

  2. Some good points, albeit the Same old same old story. I think you also have to remember Nick and and Martin, that not every IFA practice was initially set up on a fee only basis with retention of “customers ” the number one priority. Many practices have developed over the years to provide ongoing services for clients using both fees and commissions to provide that advice and I believe most of that change and dev has happened only over the last 5-10. A little more credit to the IFA,s who are providing the advice and service would do wonders! Do a piece on how advisers are changing and providing a more proactive service to their clients and the benefits to all.

  3. Trail is deferred initial is another comment I often hear. I took lower initial and therefore higher trail is another variant. We realised a long time ago that trail is hard to justify on many clients where as you say Nic the relationship has changed over the years. So over the past we ensured we charged the client what it cost UP FRONT and trail was only used to pay us a fee for on-going service such as reviews and as solicitors put it, care and attention at all times! Sadly the FSA has bought IFAs line and the RDR has been compromised accordingly.

  4. trail won’t matter soon Nic, levies will finish us all off!

  5. What Nic writes if fair enough. However, it is how Std Life do it and whom they contact.

    I had a client where i was doing an open market option. I was active with the client but Std Life told the client they could “cut out the middleman” and use their service instead of mine. Clearly, not cutting out the “middleman” as they became it and also trying to persuade a real client to dump their IFA who was actively servicing.

  6. Good article, if a little dated; clients are more savvy than ever (a good thing) and many are voting with their feet to find advisory firms who DO offer a ongoing relationship that is not predicated around a product sale once or twice a year.

    I’ve never met a client who didn’t want an ongoing relationship with their financial adviser. As in, NEVER. That’s not to say that all will accept your terms of business and fee rates for such a service – but that is another matter.

  7. Call me a cynic Wayne – but a good story about IFAs wont sell papers (or webspace!) – so I would say not much chance of that!

    However – I cannot see the fairness of Standard Life offering an incentive to clients to return a form which may entice people in to sending it back just with the hope of winning an Ipad – and possibly many a client ticking the box as they havent seen their IFA for a while ! But then when they come to retire and should have the assitance of an IFA – will the same people seek this or accept the offer of an annuity from Standard LIfe which seems the easiest option? Answers on a postcard – for the chance of winning a ??????? .

    Why not just send the letter out without the incentive –

  8. Largely agree with whats been said….the “millions slipping through the net” is for a variety of reasons and the press and negative portrayal of the whole industry collectively does not help at all, especially when a lot of IFA’s, for a long time, have been doing the right things all along.

  9. This is a synical attempt by Standard Life to out the IFA, I recently received a leeter from Standard Life saying the Client was comming up for retirement which I new as I serviced them, I contacted the Client the same day only to hear they had sold the client there annuity, a complaint is now underway.
    I have had Standard Life contact my high net worth clients directly and offer them a direct service, despite the clients telling them they were being looked after they transferred the agency.
    It’s time IFA’s stopped using Standard Life, they are not the company they were.

  10. This is an interesting piece but what happens next?

    Standard Life and its peers have a problem on their hands. The new IFA landscape has little place for old-fashioned, big insurers. Less product will be sold and what is will be far more likely to go to specific wrap providers than a Standard Life Investment Bond or an Aviva Personal Pension (yes I know they have wraps too but…).

    Lots of sound IFA practices will no longer be able to use the ‘independent’ tag due to the bizarre new definition of the term invented by the FSA.

    Can anyone else see a business solution here that might not be 100% in clients best interests? Big insurers with loads of orphan clients and lots of advisory firms that can no longer claim to be independent.

    There are deals to be done here. The law of unintended consequences strikes again at the RDR.

  11. Ah ! The world according to Nic Cicutti.

    If only everything was so simple.

    1. IFAs are obliged to maintain records on clients transactions for a minimum of 5-7 yrs and in the case of pension transactions indefinitely. Who is supposed to pay for that ? The FSA does not make any contribution to this although they insist we have to do this.
    2. To receive trail or renewal commission is a contractual arrangement between the IFA and the customer for “servicing” their account, that may involve an annual face to face review, or just a policy valuation summary of all their plans.. That has to be paid for. There is also the matter of the terms of business the Life and Investment firms offer the IFA which includes payment of trail and renewal commissions. I have yet to see any statement in Providers terms of business and agency agreements which allow them to renage on their obligations to pay renewal and trail commissions – Anyone seen that ?
    3. IFAs carry an indefinite liability for claims against them without benefit of a long stop on claims so to destroy files at any time may not be wise. Therefore there is an additional cost in storing these old files and having them available to stem the tide of vexatious and malicious claims by timewasters, who if they are not successful cannot be held liable to the costs of defending the claims.
    In any other “profession” and I use the term loosely due to the perception that so called Professionals only provide a service for a fee and those advisers who have to date provided advice and service based on the transactional route, the right to challenge the decisions of tribunals is enshrined in law, we do not have that right, so we are entitled to receive a payment for losing that right.
    4. The service provided by an IFA to his / her client is open ended, they can call us anytime (if of course we manage to stay in business post 2012 after this ridiculous onslaught on our sector by the FSAs RDR ) and they expect us to have their information to hand. Computer systems have their uses of course and we could spend countless hours scanning in every document (THAT COSTS MONEY in time and staff costs) are we not to be paid for that work the regulator insists on.
    5. As we are required to maintain proper records so that clients can access their data and personal information at the drop of a hat under a Data Subject Request, that is another service we provide
    6. I personally try to look at every file every year, update their investment values, print off a summary either for the file or to prove I performed that task and usually send a copy with a covering letter to the client enquiring if there are any further requirements for ongoing advice.

    The RDR will ruin the IFA sector and you and your press colleagues will have less readers to abuse.

  12. Nic, I feel that you are slipping up. Having only 10 comments, and most agreeing with you

    Come on now, is your job not to raise the blood pressure of the old school bond salesmen sorry ‘advisers’?

  13. Wow Ned. That scanning and back up service you use must be a lot more expensive than the ones we use if you think that 50bps trail pays for that.

  14. Presumably all large providers will, one way or another, find some basis to hang onto the trail themselves. Clients requiring ongoing advice will end up paying for it again in some way. I have no trail and charge by the hour so personally couldn’t care less, but it seems to me that the consumer will end up being stitched somewhere in the equation.

  15. Black and White journalism from someone who is writing at the level he is capable of.

  16. I think that we all have our ‘retrospect-o-scopes’ out here!!

    I am the first to admit and agree that the history of our industry (and it is an industry, not a profession!), is tarnished. However, we should all recognize that IFA’s did not have a say in level of commissions that were paid. Yes we could have done it on nil or reduced commission, or on non indemnified, however as a whole, the commission was set for us.

    If the commission structure offered by a provide had in built trail or renewal, then so be it. I think that IFAs took this on board and would be counting on it for the future. The fact that they aren’t providing a service now doesn’t matter a jot. If the client was aware at the point of sale then that is all that matters.

    do we really think that any of the companies, such as Standard Life, are going to reduce charging structures or provide a rebate to those clients who say that they dont have an active IFA? come on! smell the beans, its a way of them stopping renewal and trail so that they can put it on to their bottom lines.

    I would however ask these providers to send out to the IFAs details of all those clients that were under their agencies and where the clients claim not to have and active or ‘live’ IFA. That way if a claim come in in the future the IFAs can provide this as evidence to cap any liability.

    in summary, i think that Nic etc are applying the rules, regulations and standards that we have in force at this moment in time. I hasten to say it, however, a bit like the FSA always do to us!!!!

    I am sure that even Martin / Nic if they go back long enough will have ‘sold’ products that have initial commission and trail or renewal commission included.

    Even if you look back to the old Skandia charging structure for its ISAs, the charging structure was set and we had a choice of either taking 4.25% initial commission, or 3% initial plus 0.5% trail. The charge to the client was exactly the same. These were commission paying contracts, regardless of ongoing service.

  17. Of course we should nic.
    We are to blame for all the other ills of this world so why not?
    I so wish we could be more like those phone hacking, lying, cheating, write anything for cash hacks.
    The world would be a better place with more wee nics dotted around the place.

  18. Nic, I read your articles rarely but always come away with the impression that you’re an idiot and this is no exception.
    You do have one-off transactions with people over the years but this is because you’re not aware of them having anything else to do. You’re clearly no businessman as anyone with any idea about running a business wouldn’t arrange to spend time meeting up with people each yea when there wasn’t anything to do for them.
    In relation to St Life, I can’t believe you can even start to justify their behaviour. I get a lot of introduced business, are you saying it would then be fair game for me to go through these clients and see how their relation ship is with their accountant and see if I might entice them away elsewhere? Of course not, ans this is what St Life are doing with the clients we’ve introduced to them.
    It’s tough enough being an IFA at the moment and it’s a disgrace that MM are even employing someone who is so clearly anti-IFA.
    MM, get rid of this idiot and get someone writing articles to lift the IFA community, not someone who tries to trample it into the ground for his own benefit.

  19. There are many issues at play here and one could easily say to you Nic, as a journalist why did you put up with NOTW ‘journalists’ doing what they did and not blow the whistle. You’re a good journalist are you not so you must have known surely?

    There are obviously contractual issues surrounding ‘renewal’ commission but this is different to ‘trail’ commission which in turn is different to the more recent ‘agreed remuneration’ which is paid for by the client, through direct deductions from their investment.

    This latter is in effect a fee by any other name as the clients overall wealth is reduced by the equivalent amount, irrespective of mode of payment.

    Personally I think commission is reward for product sales and is a poor business model for a professional practice as survival is dependent on more products being sold.

    Fees, retainers or AR have to be continually earned and a move to a service based proposition is what makes the individual a professional planner/adviser rather than a professional salesman.

    There may be a place for both but unfortunately the RDR abandoned this distinction at a very early stage

  20. What will Nic come up with next? Talk about old news and chip papers. This has been debated to the enth degree. BT charges their customers line rental. What line? You mean the one that’s been coming into my house for over 20 years, and they still want to charge me rental for that old thing. Never ever upgraded never maintained, but still they charge me. Nothing in common here folks move along.

  21. Its not so much having information and ideas but rather how they are put together. There are party games where people are given words and then asked to create sentences blindfold. Sometimes the outcome makes sense; more often it is shear gibberish, and occasionally hilarious.This article remains me a little of those games. In this case it could make sense, but does it? Or is it really just a string of ideas that have accidentally come together. It feels like a rather foggy rant because Mr Cicutti became annoyed at something.
    I really do not think that there is anything significant in the concept of there being more customers, current or not, than there are clients. The process is a two way affair, with consumers having the right to deal with advisers anyway they wish (a concept that also seems to be beyond the ken of the FSA) – it is their money to waste anyway they chose. A mixture of long term and transient customers is normal in lots of businesses. I’ve been known to buy things in Harrods. The fact that I am not a long term client is irrelevant to either their or my long term interests. Nor does it make Harrod’s a rubbish store.
    I looked the the term client in the Shorter Oxford English dictionary:-a plebeian under the patronage of a patrician; a dependant; one who employers the services of a legal adviser. There is the indication of length of tenure, but it is not explicit, which means that the current usage is either just a posh name for costumers someone sees a little more often or a pretentious name for customers. [The same dictionary gives the definition of customer as one who customarily purchases anywhere; a person with whom one has dealings.] So, in reality Mr Cicutti’s emphasis on the concept client is really a bit, no a lot, of a red herring. I will use the term consumer for no other reason that it sounds neutral.
    In the middle of the “rant” I believe he does stumble on something of interest. The functional relationship between an IFA and his/her client. Prior to 1986 the relationship between “adviser” and client more often than not was represented by the concept of sales/customer. The concept of adviser was born in the 1986 Financial Service Act. Some practitioners may have used the term before that time, but it wasn’t universal. Broker was more often the concept used. Sales was more often the technique used. And, as in every other walk of life there were good and bad practitioners. As there were good and bad customers.
    The process of change from financial salesman to financial adviser has been a long and slow one, on both sides of the counter, partly because it was a forced rather than natural change. If clients really wanted pure advisers a market would have arisen.
    A crucial question in that development is “Are the consumer’s requirements of any relevance in the process?”. Most of the push to provide advice has come from the Regulator. I am not sure that much has come from the consumer. A large part of business still arises from a consumer wanting a mortgage, a pension, an insurance policy. They have to endure the advice process. So we may have a little ambiguity in the “advice” process. Ambiguity, though a natural human phenomenon, is something with which the FSA cannot cope, so consumer’s needs become subservient to the FSA’s.
    I would tend to agree that for the Adviser a product sale is a desired outcome, in order to gain remuneration, so it is possible to argue that advice may be biased towards a product solution. But, on the above conjecture, that is what the client wants in the first place. So the ambiguity of the relationship grows.
    Even with longer term clients the relationship will often centre around the long term management of products. Yes, there are clients that may not fit into this explanation, but I would suggest they are a small minority. So I would accept that there is an unusually defined relationship in play, but only when seen through the eyes of regulators and wooden-spoon stirring journalists. For advisers and consumers it’s just commercial life.
    The current remuneration strategy for advisers arises from the perfectly logical commission basis of when advisers were brokers. It should be pointed out then that advice did come free. There was no dual pricing. A consumer going to a provider would pay exactly the same price as going through broker. Whether that was fair for the consumer only time will tell when we go into a no commission era. Will they then be willing to pay for advice and the product separately.
    My own research indicates that commission was only responsible for 1/3rd of the the total administration charge on products. I doubt that the overall cost total will be less under RDR for the majority of people, though I would put a bet on the rich winning out.
    Trail commission arose out a dual pressure. The first was to reduce initial commissions and thereby reduce early termination charges. The second was to remunerate advisers from the increasing trend of ongoing annual advice without having to crowbar it out of clients. The changes came about though commercial pressures, and have not, to any noticeable extent been resisted by actual consumers.
    Remember also that it is the client’s product and they should be taking some level of responsibility for it, even if that is merely picking up the phone and asking the adviser how it is doing. I can guarantee, from personal experience, that there are a high proportion of clients that do not do anything about their policies once they are in force, even after being prodded by advisers, but if anything goes wrong they will be the biggest screamers. Yet there is still a cost to adviser firms that needs to be met. Advisers do run businesses rather than charities.
    So clients and advisers are jointly responsible for the concept of trail commission. It meets a need. So the word “blame” is really just for a cheap headline, and since you are mainly writing to the industry here, cheapens your journalism.
    Are there problems with the way the process works, Undoubtedly. Just as there are problems in the way in which journalists acquire information, and fund managers run off with other peoples money, and MPs fiddle their expenses. Problems are part of life, they will never go way. The process is to determine whether the problems are significant or insignificant and whether the cure is better or worse than the problem. I have a suspicion that whilst these problems make excellent headlines they are less damaging than is generally believed. This is a comment on which there will be divided belief because there is far too little actual information. Most criticism of these areas is founded on conjecture rather than fact.
    Standard Life have cottoned on to the fact that the landscape will change dramatically in 2013, and that they may well be a dinosaur, so they are starting to panic early. Standard has relied heavily on the adviser industry in the past, and so is a little out of touch with normal social skills. The FSA are making it extremely risky to recommend products, and alternative avenues of purchase are thin on the ground, so Standard have made some very clumsy moves try to ensure their survival and in doing so confirmed their dinosaur status. When you are heavily dependent of a particular channel of business introduction in makes little sense to upset it before you need to.
    Now I have been able to say all that without allocating blame to any side (other than to the FSA, so that doesn’t count). Lashing out merely puts people into a defensive mode from which little constructive thought will arise. Trying to understand why we are where we are may allow people to deal a little more imaginatively with the problems that beset any human operation. I acknowledge that it may not sell papers, but surely in an freely distributed industry paper some people should be able to rise above that need.

  22. I can see the tone of these discussions moving swiftly from outrage to panic during 2012 as the stalwart product sales IFAs realise that they have huge cashflow issue on their hands.

    Many firms who have been successfully operating a sensible, service-oriented model with their clients for may years see RDR as a huge business opportunity as lesser advisers either shed their customer databases or their customers move on – to Standard Life Direct, or to other quality advice firms.

    Active Money Pension + MyFolio funds on Standard Life’s consumer-facing website offers signatureless sign-up in 15 minutes, risk profiling nd auto-rebalanced portfolios. This solution beats many adviser ‘propositions’, even when a modest level of trail remuneration is taken.

    And Ned, if you’re justifying what you charge your “accounts” purely in terms of the costs and efforts to maintain them rather than by providing quality, value-based financial relationships, then you’re missing a trick. Presumably you were aware when you took your indemnified initial commission of your 5-7 year obligations and had factored into your business planning process.

    GWJ

  23. Peter Davies @ Create Wealth 18th December 2011 at 10:11 am

    Have never dealt with Standard Life – never liked them as a company & dont trust them.

  24. I have often used trail commission to pay for initial advice. I have also used trail commission to pay for ongoing servicing. The key to all this argument about commission or fees or anything in between is “does the client get the service that justifies what the advisory firm receives in commission or fees”? The reality is that many advisers cannot justify what they charge. The proof of this will be clients choosing with their feet. If they are enticed by iPads then I suggest they werent clients at all. Build a meaningful relationship with your clients and they will remain loyal.

  25. @ Ned naylor: So, to summarise your issues, you failed to draw up and cost out a proper business plan. Did I miss anything?

  26. There is a strong rumour afoot that a recent Panacea Survey has created a regulatory firestorm. The survey claims to be the first “true” IFA consultation over RDR and the results promise to be a significant embarrassment to the FSA. The survey closes today at 5 pm but you can participate in it https://www.surveymonkey.com/s/rdrsurvey2011

  27. In the past couple of years I moved to another firm as an IFA. During the process I used a recruitment company. When the recruitment consultant asked how many ‘clients’ I had, I gave a figure of less than fifty and he scoffed that it was low for my time in the industry. He was an example of an industry dinosaur who could not distinguish between regular high paying and serviced ‘clients’ in contrast to a list of people who had been ‘customers’ at sometime in the past for an individual transaction. Clients who receive a good personal service will not be drawn away. The fact that Standard Life intend to keep the trail is, as Nic says, another matter.

  28. Seeing clients once a year? I should be so lucky.

    I had a complaint today through lack of service to a particular. I do a 1,200 mile round trip twice a year to see clients in one region. On top of this chance to see me, this client also gets about 4 updates a year and still this is NOT enough service for her. As always the case, the investment is very small and not bothering with, but I do bother to contact her, and still get a complaint about lack of service.

    Some people eh!!

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