Fidelity's decision to take a stand against brokers which rebate trail commission has been the talk of the investment industry for the past week. But while most IFAs and fund managers applaud the move, their reasons for doing so are very different.
Most IFAs value trail commission, especially in view of the forthcoming stakeholder era which threatens to dras tically reduce front-end char ges and commission across the financial services industry.
The main purpose of trail, or renewal, commission is to pay IFAs for ongoing service to the client after the initial purchase has been made.
Bates Investment senior analyst James Dalby says: “Renewal is paid for a service, not as a right. The bottom line is it is necessary. IFAs who want to provide a research-focused service cannot do it without that commission.”
Fidelity says its major concern is that the
practice of rebating renewal commission could drive smaller IFAs out of business if it became the norm across the industry.
Marketing director David Cowdell says: “It puts IFAs in a very difficult position. They either decide to do nothing and lose market share to this new breed of business or they join it, which could put them out of business or lead them to cut corners.”
Many in the fund man agement community agr ees with Fidelity's action alth ough their reasons are more pragmatic.
Schroders and Thread needle are two houses which say they have considered taking a similar action to Fidelity and may well still join them if trail rebates start to become commonplace.
Threadneedle communications director Richard Eats says: “We have not yet terminated any agreements with those running commission-sharing offers but we see the concern. We see two major problems.
“First, providers are left to deal with all client services once the relationship bet ween the client and intermediary has been broken down. Second, we are not convinced that all those offering this service have the systems to do it effectively and properly.
“Clients change address es and jobs and we wonder whe ther these firms have the ability to keep track with them. If it is buy and forget, we have a problem and if this grows we may have greater concerns.”
Artemis stopped paying renewal commission to rebating IFAs over a year and a half ago. It stands by the IFA view that trail is paid for a service and is not for the client.
Managing director Jamie Campbell says: “Any annual fee we pay to intermediaries comes out of our own annual management charge.
“We are only prepared to subsi dise intermediaries to provide a high-quality service for their clients.”
The more cynical voices in the investment community see Fidelity's move against firms such as Chartwell and Comshare as a direct result of pressure from the country's biggest discount brokers.
Best Investment, Torquil Clark, Hargreaves Lansdown and Chase de Vere are four of the UK's biggest IFAs and offer discount brokerages through a white-labelled version of Fidelity's fund supermarket. These companies are unhappy with the likes of Chartwell undercutting them by rebating trail.
Hargreaves Lansdown dir ector Peter Hargreaves says brokers that discount trail have a flawed business model. He believes their policy to rebate renewals to new clients and yet not extend the service to existing clients is bad business.
Furthermore, he supports Threadneedle's view that its systems will not be able to deal with the complexity of trail rebates. Hargreaves says: “I am looking at whether I am going to continue supporting fund managers that do not take a stand against this act ion. Fund managers are condoning act ion that is nothing but a con trick.”
Chartwell and Comshare are not about to back down in a hurry. Although they want to continue selling Fidelity's funds and are willing to look for a sol ution, they strongly believe they should be able to give clients the choice of paying for an ongoing service or receiving a rebate.
Chartwell chief executive director Craig Wetton says: “Commission is commission. It does not matter if it is initial or trail. A product provider dictating to an IFA how it should deal with it is bad news. Fid elity's action is res tricting client choice.”
The respective cases depend on how renewal is viewed. If trail commission is simply regarded as an extension to initial, then it would seem fair that IFAs should have the choice to use it as they wish.
If renewal is seen to be for an ongoing service, then Artemis's app roach not to pay trail at all for those that rebate it also seems fair.
Not all small IFAs are universally in support of Fidelity. For some, Chartwell's view that IFAs should not be dictated to by product providers is a crucial one.
Simpsons partner Andrew Merricks says: “I think the IFA should have choice. The public are basically aware of what they are paying for. I am very flattered that Fidelity says it is sticking up for the smaller IFA but I suspect it is more to do with Fidelity's sup ermarket than with us.”
As the debate spirals on, there is perhaps a case for stronger guidelines on commission – something that may be provided by the FSA's ongoing push for greater disclosure within the financial services industry. It would seem, however, that if more companies follow the Chart well and Comshare model, the fund management industry could be ready to take a stand against them together.