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Graham Bentley: Trail casts an ugly shadow over advice market

Trail is not a payment for service; it remains at best an inducement and at worst a bribe

Bentley-Graham-GBII-2013In its final report on the asset management market study, the FCA has signalled its intention to investigate the firms which control the flows of money between investors and asset managers.

It will focus on platforms’ and advisers’ influence and the impact on competition. Sensibly, it is treating the provision of investment management services, such as asset allocation and model portfolios, in the same way that it dealt with more obvious asset management functions.

However, talk about the FCA considering turning off all pre-RDR trail commission seems to have gained the most attention.

Subsequent online comments from advisers complaining about the development ensued.

A number pointed out the inability of providers to facilitate adviser charging, clearly concerned that they might be required to ask the client for a cheque. Others protested that providers would just keep the trail so the client would not benefit, overlooking the fact the FCA’s initiative is precisely to eradicate “dirty” share classes.

I find it hard to envisage a consultation process that would not require a life and pensions product to be enhanced proportionately. One consolidator bizarrely suggested switching off trail on funds would be illegal.

FCA eyes sunset clause for pre-RDR trail

But the majority opined that trail was generated in return for servicing, and, since they still were, it should not be removed. Frankly, the entire edifice of adviser charging in the industry is based on the myth that trail was and is a payment for service. It was not. It was, and remains, at best an inducement and at worst a bribe.

Lest we forget, a “commission” was a reward for the introduction of a customer’s money to a product provider, not a fee for advice. The product may have been underpinned by investment funds but the commission was attached to the product, not the individual funds.

If you advised and did not sell a product, you did not get paid unless you had the gall to ask the customer to. Of course, virtually no one did. The client thought the advice was free.  Some businesses laudably disavowed initial commission, indemnified or otherwise, and took them on the drip in the form of an ongoing renewal payment instead. But the clue is in the name. If the premiums were not renewed, irrespective of ongoing service levels, the payments ceased. Advice was a coincidental activity. Maintenance of the contract protected earnings.

Trail commission on unit trusts (Oeics did not appear until 1996) was first paid in the late 1980s. The launch of personal equity plans  increased appeal for direct investments (that is, not wrapped in investment bonds) but the maximum investment was only £2,400 – equivalent to around £6,500 today.

At 3 per cent initial commission (or, as the industry preferred, “marketing allowance”) that was not a great reward for the sales effort. As if to compound the industry’s problems, it was hit by the 1987 stockmarket crash, which decimated sales of collective investments.

The unit trust world believed Peps’ tax-free status would encourage longer holding periods. If an adviser could sign up a regular contribution Pep with trail commission, he or she would get a much greater future income stream and it would be worth the struggle to sell regular contributions.

The inevitable result was that trail became ubiquitous. If you did not pay trail, you got no business. Trail was not added onto the price; the industry sacrificed a third of its margin to buy investment capital from intermediaries who would otherwise have stuck to high commission investment bonds.

Trail became an embarrassment that required justification, hence the invention that it transmuted into a fee for ongoing advice. Pointedly, under the FCA’s current rules, advisers do not have to provide an ongoing service for the trail commission. However, in the consultation process, the regulator has been informed that some clients are paying for trail commission on an investment product, while separately paying for advice.

Asset management market study respondents have also suggested trail commission payments may act as a barrier to competition and value for money. Where disturbance would otherwise switch off trail, those investments may remain in force irrespective of their efficacy.

Post-RDR, with no trail on new business, intermediated “clean” share classes devoid of trail payments should be the standard for all customers, legacy, intermediated or otherwise. However, fund managers have been faced with two barriers to migrating legacy money to clean share classes: unresponsive clients and threatening advisers.

Remarkably, until the study fund groups required a customer’s explicit consent to move money. The FCA has now allowed managers to move those unresponsive clients.

But for intermediated clients paying for full fat share classes, since there is no contractual requirement for fund groups to pay trail, they could just turn it off.

However, many asset managers’ responses reflected fears that, by switching off trail, they would lose future business from the associated advisers who would protest they were still servicing the customer. Fund managers want to get rid of trail, but they are looking for air cover from the regulator.

Commission still casts an ugly shadow over the market. It is time to eradicate it once and for all. That said, the regulator is keen to ensure there are no unintended consequences to enforcing a sunset clause. If you feel strongly either way, you should respond to the consultation process here.

Graham Bentley is managing director of gbi2

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Comments

There are 18 comments at the moment, we would love to hear your opinion too.

  1. In the event that Regular Premium renewals/trail fees are removed for existing policies, will the amounts involved be credited to the cusiomer’s policies?

  2. I’ve seen cases of clear consumer detriment post RDR – the starkest being where ‘old style’ Personal Pensions with GARs had a commission allowance for when advice was sought at retirement however when reaching that point, RDR banned the commission and the provider pocketed it themselves – no uplift to annuity rates, no increase to fund value – leaving the client to pay the cost of the ‘at retirement’ advice twice – once through the product’s charges and again as a fee.

    Transparency is good, provided the long term beneficiary is the consumer – in reality, that isn’t necessarily the case.

  3. To balance things up, as some providers actually did, they could buy out the ongoing commission where it WAS contractural. Lincoln did it I think.

  4. Julian Stevens 21st July 2017 at 2:00 pm

    This is Mr Bentley’s view, as seen through his particular prism, but, when all is said and done, it’s just an opinion.

    Rubbishing past business practices just because they don’t fit cosily in with today’s (best) practices is a bit like one of the FCA’s hindsight reviews. Whilst commission may, in essence, have been a reward from the provider for introducing business, that doesn’t mean that no advice was involved or that the advice to invest in a particular product with a particular provider didn’t have to be appropriate.

    To claim that before January 2013 and the abolition of commission, all the industry did was flog products in return for commission is a blinkered and bigoted view.

    • Agreed. Graham makes a lot of sense when talking about the future, but is somewhat unfair when looking backwards and applying today to the past. The really bad practices which have gone favour new start up former bad practices when applied to the past business of the old good guys like you Julian.

  5. It does seem unfair that while AVIVA and NatWest had a deal with 7 or more % up front with no trail, many forward thinking advisers who did provide ongoing service took 3 plus .5% ongoing and on bonds (we have very few) changing now benefits those deals done which shafted the client. I’ve seen cases with axa where 10% was taken up front!

  6. This is an opinion and should be seen as this as much of the articles on this site. There are many ways of running a business properly and fairly.
    Mr client – would you like to pay us out of your 5% bond withdrawal or by trail….
    And you are right Philip – we did take much lower initial to take higher trail to pay for servicing.

  7. Robert Milligan 21st July 2017 at 4:12 pm

    As an adviser of thirty years I feel ashamed that Networks receive On-going Trial from client polices when the Advice Firms has clearly bunked Off into retirement, Had they been directly regulated the Trial would have stopped, It ‘s a disgrace, the Networks have even increased their take of these figures and knowingly passed on the reduced amount to debunked IFA bank accounts, if your not servicing the client how dare you take any money

  8. That’s one view and not one I agree with personally. Exactly how is trail commission “at best an inducement and at worst, a bribe”? It was an option to defer initial commission and that is all it ever was. Instead of taking 7% initial. 3.5% plus 0.5% over a 5 year period was the same thing when you discounted values into account. All providers had this option and it was up to the adviser to agree with the client as to how he/she wanted it. Regardless of your views of decency limits over the 7% it was available. I always viewed trail (as Im sure the vast majority of advisers did) as a good method of building a recurring income stream to the business to help profitability regardless of whether or not any servicing went on. Indeed my ToB used to state it was up to the client to request a service appointment. That said having had the upbringing in direct sales, I have always gone to clients regularly to show what their policies have done in the last period. But that was for the opportunity to get more business. Lets face it that is why we are all here. To do business and make a living. All this garbage about trail being a dirty word (or in the words of the author “Trail casts an ugly shadow over advice market”) is exactly that…… Garbage. Our regulated world may have allegedly moved on from a sales world, as it was then, to an “advice” world now. It is arguable whether this has happened at all. It is also arguable that overall, it is generally a better place now to then. So many more people unable to get access to an adviser because of “prohibitive fees” is not what I would class as a better place. Sales of regular premium savings plan has all but vanished because of no factoring in AC. Many millions of people who could have been sold these wee policies have missed out. putting something away is always better than putting nothing away but the advisers are not going to do this as they cannot make any real initial income and get recurring income on them from these. Are we better qualified people now to then? Yes (on paper) – can’t argue with that however for the majority of those still remaining I am not sure what actual difference it has made. I would suggest that the bulk of us still do what we do in exactly the same way as we did prior to RDR i.e. Fact find, research, recommend and implement. (or in old money – FF, research, close. The FCA’s own stats recently showed just how much more adviser income was provided via provider facilitation compared to direct from client. It was huge. It therefore demonstrates to me that we still get paid an “implementation fee” for implementing our recommendations to the client. Back in the day we used to call it selling a product(s), so RDR and clean share class crap has made no difference to that either. Are we more professional under RDR than before? I doubt it. I would suggest that we (as in the massive majority) were equally as professional in what we did for clients then as we are now. Are clients better off with better outcomes now to then? I would suggest they are worse off as the OAC seems to be higher now to the 0.5% trail. I would suggest that clients are actually off now taking by our “advice” and paying OAC than they were when trail commission was applied. Based on the FCA stats mentioned above, the Post RDR world is different in only 2 ways. 1) The name of the income we get for what we do is adviser charge not commission. 2) It is generally higher than trail commission. It is always the client who pays and this comes out of their funds under management. So, Mr Bentley to say “Trail casts an ugly shadow over advice market” is, in my view, wrong.
    I know there are those in the industry who operate direct client fees only so before you blast me by saying “We get paid only by the client”, good for you. If it is how you make a very good living that’s fantastic but you need to accept its not the only way and you are the exception to the rule.
    Anyway “nuff” said – I am off for a few pints having just implemented some stuff for a client. Cheers

  9. Neil Liversidge 21st July 2017 at 4:54 pm

    Mr Bentley’s comments may apply accurately to some firms but not ours. From day one we took a small initial plus trail and we took the same on bonds as on ISas and non-ISA collectives. Bonds invariably paid over the odds to induce the greedy so we rebated the difference to the client. When Mr Bentley writes “I find it hard to envisage a consultation process that would not require a life and pensions product to be enhanced proportionately.” he is clearly unaware of the practice followed by Standard life for one, who have used any excuse to turn off pensions trail / renewals with no enhancement whatsoever. We are now paid nothing for servicing such business we wrote with them.
    As a matter of good faith we continue to service it at our expense. (FCA and sundry pontificators please note that this ‘cross subsidy’ is a cross subsidy from MY bank account and MY time, not from other clients as is typically alleged.) If there was any justice the regulator would require insurers to pay over to clients every penny they have pocketed from cancelled trails and renewals since RDR. I can’t see that happening though, given how regulators have a habit of rotating out from the FCA to the insurers they have previously ‘policed’. Were they to be a bit tougher on them, such cushy numbers might be harder to come by.

  10. I stopped reading your idiotic attention-seeking ramblings when I reached this ‘… trail was and is a payment for service. It was not. It was, and remains, at best an inducement and at worst a bribe.’

    • Anthony Fallon 21st July 2017 at 9:39 pm

      Agreed

      … and just a few days after research reporting “advised” Clients were more than £43,000 better off than “non-advised” individuals.

  11. This article is bunkham. Let trail commission die a natural death, over time, rather than ballsing everything up again after the RDR. Clients will probably pay more in fees than they are in trail commission, In common with other I gave up a lot of initial commission for the trail and it gives me an incentive to make sure the contract is performing in the way the clients hoped. If it isn’t performing I change the contract, and charges fees.

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