There is a lot of discussion and interest in the topic of trail and renewal commission. This came up in the Treasury Select committee representations and in its report. What concerns me is that there is a great deal of misunderstanding about this subject.
The industry has a duty to explain what ongoing trail is, what value it provides to the investor, what services it buys and to explain that the sums involved are not, in many cases, as large as some of the headline figures suggest.
For example, I quote from one article that stated the renewal commission received on an endowment was as much as 625. This compared with an initial fee of 1,110. However, this is a 25-year policy, and the amount of renewal commission paid is 25 a year. Another example given was of trail commission on an investment bond where the trail fee over a 10-year period was aggregated to 1,200. This makes an annual payment of 120. As most IFAs know, this is not enough to cover the ongoing servicing of a client.
Trail fees are an important element of payment to an IFA to enable them to look after the client on an ongoing basis. Scrapping trail fees means that the amount of fees the client is directly charged would need to be increased.
Simplistically, if trail fees represent 20 per cent of an individual IFA’s fee income, then removing them means that client fees would increase by 20 per cent. An IFA must be properly remunerated for looking after a client, without which a decent service cannot be given. Good financial advice is not cheap but arguably poor financial advice is dearer.
We have not helped ourselves by in the past stating that advice is free. This clearly is not the case even though commission-based advice was portrayed as free in the past.
The facts of the matter are that commission-based advice could be very expensive. And there was a cross subsidy between work done on one client and commissions from another client effectively supporting this. As such, we have not been good advocates of how much financial advice really costs.
All of us know about the escalating fees involved in professional indemnity insurance and the financial services compensation scheme to name but two that are topical.
It costs a lot to run an IFA business if you do it properly. We need to improve our communication with clients and educate them on how long things take to sort out, and what is the proper level of remuneration for the expertise they are buying.
For us as IFAs building value in a business, trail fees are useful as they enhance the value of the business. While this may seem to have no connection with clients, a well run and profitable business attracts the right calibre of people both to act as advisers, to administer the work and to run them.
An increasing number of IFA businesses are now run by business people, rather than advisers who have grown into the role. Well run IFA businesses provide a secure environment for IFAs and client alike. It’s not helpful to clients to have an IFA business so poorly run that it goes out of business and ceases to provide any advice to clients.
Indeed, this is one of the bug bears of the critics of trail commissions, that ongoing advice is not provided to justify the payment.
On this note, there are instances where ongoing commission, whether it is trail or renewal, is simply not sufficient to provide the most basic of services. This reality needs to be acknowledged and explained to the client.
However, there are instances where firms do take larger sums of trail and are not providing an ongoing service for clients. If this is the case, clients need to understand that they do not have to stay with that particular firm. They can move the trail and renewal commission to another firm that is prepared to give ongoing advice to the client, even if they did not recommend the contract to start off with.
The client is in control of where the ongoing fees are paid. Indeed, the client can request that the ongoing fees are paid to no IFA at all but simply retained by the product provider.
Most investment firms will respect client wishes and allow them to move ongoing fees to another IFA. There are exceptions when part of the ongoing remuneration is regarded as a portion of the upfront fee and therefore deemed as initial commission. There are also one or two odd product providers who simply do not move trail, but these are a smaller part of the total.
I guess, all this comes down to education of the consumer about the value of ongoing advice and that they are in control. A better educated public would create a natural commercial edge to trail.
As advisers, we should be sponsors of clarity and explain to consumers the true cost of advice, both initial and ongoing.
Amanda Davidson is a partner at JohnScott/ Holden Meehan