One has to wonder whether this can be allowed to continue under the FSA’s treating customers fairly regime.
In a true advice culture, the IFA should provide an ongoing monitoring service as the rationale for the payment. How many clients are aware of this payment or believe they are receiving a service in exchange for it?
How many clients receive recommendations from their IFA to switch funds when managers deliver poor performance or the outlook appears bleak? I suspect very few. How many clients are double-charged for such a service by the IFA taking trail commission and 3 per cent for switches? I would suspect it would be quite a few more.
The IFA must also consider who benefits most from the structure of retail funds. From a typical annual charge of 1.5 per cent, the IFA gets 0.5 per cent trail but the manager retains 1 per cent to cover the costs of delivering what is, in some cases, no better performance than could be achieved from a tracker or exchange traded fund. Is it right that the IFA should receive just 33 per cent of the fee when they advise the client and have effective control over where monies are invested?
In a multi-manager environment, the situation is even worse. Total expense ratios can exceed 3 per cent and the IFA still receives just 0.5 per cent. The drag on investment performance is huge and the rationale for a trail payment is actually less as the IFA hands most responsibility for asset allocation to the multi-manager.
A recent trend has been to deliver mediocrity under the heading of financial advice. To me, this is one of the most worrying trends in financial advice. I cannot believe there are IFAs who believe it is correct to charge a big fee for the investment to be placed solely in a tracker fund.
Yes, I agree asset allocation is an important factor to consider and some actively managed funds underperform but to charge a fee for advice and then only advise on the product wrapper verges on negligence. At least the tax position of the investment will be correct but the correct tax position and mediocre performance is nowhere near the correct answer.
Such IFAs hide under qualifications which fortunately fail to impress the majority of clients. They avoid providing the full service because they do not have the resources to fully analyse the funds available in today’s market. They also do not have the resources to monitor recommendations they have made.
In this multitude of investment options, where would I want my mother to invest? Would I want her to invest in a multi-manager portfolio with high charges and ongoing commission, with an IFA doing very little? I suspect not.
Would I want her to invest in a maximum initial commission environment where reduction in yield looks as poor as a multi-manager TER but without the benefit from active switching between the best managers? Again, I suspect not.
Would I want her to accept mediocre investment performance but the most beneficial tax situation? No, thank you.
What we need is a situation where IFAs charge a fee for initial advice and ongoing monitoring is paid for by trail out of a reasonable annual charge. I believe this is the true strength of a quality IFA.
Let us hope that clients see through the other options and accept that quality ongoing investment advice can be provided at reasonable cost. IFAs providing this level of service should be confident their strengths will be rewarded by ongoing growth.
Let us also hope the balance of power between the fund management groups and IFAs alters so that the provider of the service receives a reasonable margin for a quality job and the underlying commodity – investment performance – is charged at a more reasonable rate.
Peter Heckingbottom is deputy managing director and investment director at Pearson Jones.