In my column, I presented an edited version of correspondence between myself and Hargreaves Lansdown’s Peter Hargreaves, in which we discussed the issue of trail and initial commission.
Based on that, I received a range of comments from IFAs, all of them responding to the issue. It is hard to do them justice but I will try.
One adviser writes: “I have been a fee-based IFA for about 13 years now and I found it quite tough in the mid-1990s. I had very little help or guidance on how to tackle fee work and was fortunate enough to meet another female IFA who charged fees. I joined the Institute of Financial Planning, met more people who charged fees and started to learn how to do it.
“As for trail, I am with Peter on this one. He is right that lots of advisers do not conduct a review and I am guilty of that myself on the smaller clients I have who do not want to pay additional fees for a review.”
Another IFA says: “I received a call from one of my clients who has a self-invested personal pension and he wanted to make a further investment and choose some new investment funds. Of course, we had the usual discussion regarding fees and came to a satisfactory conclusion.
“When I called the various fund managers, I asked for the initial commission to be reduced to nil, with no trail, as we had made our own arrangements but it advised that the annual management charge would be the same whether nor not we took trail. How bizarre. Why is this? I find it hard to understand so we are taking trail and reduced our initial fee for this investment.”
Not everyone agrees. One adviser tells me that he is bored by the subject and clearly believes that clients have perfect knowledge and understanding of the market. He writes: “We waste so much time in endless conversations about the best model for clients when we have client utopia already. Every available avenue of fee/commission structure is open to them.
“The vast majority choose commission. It is their choice. What irks the fee/trail brigade is the inventiveness of providers who pay up-front commission. They do so predominantly because that is what people want. So do not buck the market and attempt to hijack IFAs’ remuneration model for your own financial gain.”
Despite this comment, other IFAs appear to be moving in the right direction. One writes to say: “Quite simply, we believe that a service-based client proposition is the only way forward, one which will provide for high quality holistic lifestyle planning on a retainer fee basis and portfolio design on a sliding-scale fee basis.”
He also says his practice charges an annual fee linked to the value of the client’s assets. “This gives a huge incentive to become the very best at what we do and to grow our clients’ assets and manage risk on their behalf.”
Inevitably, not all advisers find it easy to deal with providers, which they say insist on paying them fees and trail, regardless of the relationship they would ideally like to have with their clients.
One IFA asks: “I would be interested to know how, if you were an IFA, you would be seeking to be remunerated. I ask because you seem to be free with comments about what we do, yet do not appear to have any experience of how the industry works in reality.”
A fair point. At the end of the day, most journalists, including myself, do not have experience of what it is to be an IFA, regardless of how many years we have spent writing about the industry or the hundreds of advisers we have met and discussed these issues with.
But here are my thoughts. Were I an IFA, my starting point would be the annual income I expect for my services. I would divide that by the number of hours I intend to work. This would include advising clients, reviewing their cases and portfolios and taking into account administration costs and all the other fees and charges that need to be forked out in the course of that year.
My charges to the client would be based on an hourly rate for a pre-agreed level of service. If the client were happy to pay me entirely by fees, he or she would receive back every penny of initial and trail commission, assuming it cannot be waived.
If a client prefers to go down the commission/trail route, it would be counted towards the cost of my fees. They would get what is left over after my hourly rate is calculated. Should trail plus initial commission not be enough, I would expect the client to pay more, probably on a monthly basis.
This route would ensure that I have to guarantee the level of service promised at the outset. It also means a client has a direct interest in ensuring that level of service.
What do you think?