It is a shame because trail commission is a way that the broker market can build a sustainable business.
We built our business model quite simply by looking at the investment groups and the life companies and bringing into being a wish that we wanted to be rewarded in a similar way.
Unfortunately, the investment groups and the life companies especially hate paying trail, fund-based or renewal, whichever term you prefer. It destroys their own business model and they have never been strong enough to slash up-front indemnity commission correspondingly.
This is because 95 per cent of all IFA firm are not properly constituted businesses. They are either a one-person band salesperson or a small group of salespeople banded together.
There is little entry cost and in the first year, an IFA can make a similar amount of money as he will do in every subsequent year. Quite often, an IFA’s first year as sole trader is his best year because he has not got the administration of previous years to bother with. He then gets used to the lifestyle that his indemnity initial commission provided in that first year and is never able to tighten his belt and live purely off renewal. It took us seven years of belt-tightening to get to that position.
However, the thing that irritates investment groups and life companies most is brokers who do nothing at all for the renewal. This philosophy starts almost at the point of sale. Many execution-only discount brokers offer the product on the basis that they will sell it cheaper and give no ongoing service.
The companies are crazy for paying trail to those brokers because they are not expanding the market, they are not promoting products, all they are doing is promo-ting cheap.
The reason they should not deal with those people and the reason why they give trail commission a bad name is because the ongoing servicing lands straight back on the investment group or the life company.
You need to ask Invesco Perpetual how many people it employs just to service clients. These are not direct clients, these are the clients of brokers who give no after-sales service.
I have every sympathy with all the people who massively opposed Clerical Medical’s initial decision to cancel trail but I have even more sympathy with Clerical Medical, who knows full well that it is having to do the work that the trail was supposed to pay for.
However, I suspect that Clerical Medical has not got enough facts and figures to show us which brokers clearly are not servicing their clients.
Perhaps Clerical Medical’s main error was not to cancel trail but to provide it in the first place to fly-by-night, here today gone tomorrow IFAs who are only interested in the lifestyle that the initial commission and trail have led them to become accustomed to.
The only way that trail will work is when the general public know and understand trail and realise that it is their lever for service.
Clients should have the whip hand. If they do not believe they are getting service then it should be within their rights to transfer that business to someone who does offer them service.
The one thing that is controversial is whether or not they should merely allow the trail to be cancelled.
I believe they should only have the choice of either forcing their IFA to service them or the choice of changing their IFA. This would massively improve the professionalism and quality of ongoing service that is so sadly lacking in our industry today.
It really is up to the product providers to vet their agents and not listen to their own salespeople who will allow anyone to be an agent.
The agent has to show at the outset that a: they have a viable business, b: they are going to be around to service the client and c: that that is their business model.
If they have a wham bam thank you ma’am, how big is the commission, type of business then the contract they should have with the providers is initial indemnity commission only.