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Nic Cicutti: Godfather insights on historic trail

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I have long been a fan of The Godfather, both the movie and the book by Mario Puzo. The first part of the trilogy, which I watched as an impressionable 14-year-old, is a filmic masterpiece and the second part is arguably even better.

But it is Puzo’s writing that is the real triumph. Within both the book and the film, which he co-wrote with Francis Ford Coppola, the author manages to cram hundreds of lines – “I’ll make him an offer he can’t refuse” being just the most famous that leap off the page and, for a few obsessed fans, even serve as a guide to how they should live their lives.

For example, Don Vito’s exhortation to Johnny Fontane at the beginning of Part I that “a man who doesn’t spend time with his family can never be a real man”, or Michael’s comment in Part II: “I have no intention of placing my fate in the hands of men whose only qualification is that they managed to con a block of people to vote for them.”

So to discover from Money Marketing’s profile of him five years ago that Bradbury Hamilton managing director Sheriar Bradbury is also a fan of Mario Puzo’s work raises him massively in my estimation. Unfortunately, not all of his subsequent comments are as sound as his assessment of The Godfather.

Last week, Bradbury wrote a column for the paper about the collapse and sale of Ivan Massow’s trail rebating business, Paymemy.com, to the discount broker Clubfinance.

Bradbury argues: “Commission return companies are targeting a certain type of DIY client who has shunned the decision to have a financial adviser … It is worth questioning just how many DIY investors out there are investing large sums of money in order to make the commission worthwhile.

“A company like Paymemy.com would need a vast number of clients in order to justify the costs and taking a 20 per cent cut, as Massow’s company did, was not going to suffice unless clients joined en-masse.” He is mistaken in the first assumption, although he has a point in relation to the second.

Look, let’s drop this notion of “trailblazing” DIY investors. Even if it were true, they would still be entitled to the trail their advisers and brokers haven’t properly earned.

But in any case, my own reading of the vast majority of literature and websites from businesses promoting rebated trail commission is that they are targeting long-standing IFA clients who have received no service from their advisers since taking out policies or making investments years ago.

While we are at it, let’s also knock on the head the idea often advanced by advisers, that trail payments are only a substitute for the upfront commission they declined to take all those years ago. Their implication is that if trail were to be switched off now, all the good advice they gave at the time would remain unpaid for.

Yes, there will be some advisers who gave advice over the past year or two and forwent initial commission in favour of an ongoing income stream.

But in the overwhelming majority of cases trail payments have continued to be made for many years to advisers who have not seen the client since the day the product was first sold. Many advisers will have made sales 10, 15, even 20 years ago for which they continue to receive payments from fund managers and life companies.

Indeed, one of my personal favourites is a large and well-known adviser business that continued to receive a few pence every month from my old ScotAm endowment policy until it matured in 2008.

Its entitlement to this commission payment came from a form, one of a stack of about 20 or more I barely remember signing in the mid-1990s for another IFA. In turn, this firm was subsequently bought, mismanaged and sold on several times by various owners, each raking in money from a policy first taken out in 1983 and about which none of them gave any advice whatsoever.

What keeps those payment flows going into advisers’ coffers is a combination of sloth and ignorance on the part of their so-called clients. In exactly the same way as banks and car insurers rely on inertia to keep their customers corralled into uncompetitive current accounts and policies, the same happens with trail.

The bottom line is that consumers are lazy: they don’t want to be bothered signing cheques and managing micro-payments all the time.

Harry Katz’s column in the same issue of Money Marketing makes the same point. Harry gave his clients the option of either directly paying him a fund management charge half-yearly in arrears or transfer to a platform that made a charge on their investments. Most happily switched platform.

It may be true, as Bradbury says, that regulatory costs and technical issues make a rerun of Massow’s idea unviable unless it acquires scale. But that situation will not hold forever.

As Puzo wrote of Don Vito Corleone: “There was no greater natural advantage in life than having an enemy overestimate your faults unless it was to have a friend underestimate your virtues.” The virtues of trail rebating are yet to be discovered.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Firstly, I don’t see the connection between a book/movie about warring Mafia gangster families in 1940’s New York.

    Secondly, I see no need to rake over the embers of now outdated trail commission-for-no-active-service practices. Is there any evidence that this is still common? Why not just allow evolution to take its course?

    Thirdly, the article totally overlooks the fact that trail commission on sales from the distant past pays towards not just regular reviews but towards the costs of:-

    1. maintaining records,

    2. providing services that may be required at some future date (an invoice for assigning or encashing said investment or for notifying the provider of a change of address would hardly be welcomed by the investor or his/her representatives) and, of course,

    3. the open-ended liability for the suitability of the original advice and

    4. accounting to the FSA twice yearly for every penny of recurring revenues (to exactly what end remains unclear).

    Yes, investments should be reviewed periodically, but reviews by no means constitute the whole picture. And, again, what has any of this to do with a book/film about warring Mafia gangster families in 1940’s New York?

  2. The virtues of trail rebating are yet to discovered… That implication is that there are some – really?

    1. Clients entered into an agreement with their adviser and quite a lot of clients have the integrity to stick to their agreements.
    2. The amount in most cases is quite modest. Even £50k paying 1/2% generates just £250 per annum. While on Nic’s Scot Am Policy £1 per month over 23 years = £276
    3. The time and hassle involved in trying to shut down/ redirect trail payments from a client perspective is disproportionate to any win. For wiser to appoint an IFA who provides decent service and whose remuneration takes into account the commission that switches across.
    4. Clients have the right to contact their investment house and ask for trial to be switched off or sell and repurchase a clean share class
    5. Selling a plan might trigger tax on which paid for advice would be required
    6. Finally I can’t imagine that there are many clients with £100k or more invested where the adviser is trousering £500 a year for no service who won’t already have done something about it!

  3. I presume you realise that even when the Funds under Management (FUM) charge (or what you prefer to call trail) is taken from the platform it doesn’t mean that the full 5% is taken or that rebating is not possible or offered.

    As far as the rebaters are concerned one may ask why they. should get anything at all. By their own admission they do nothing for it. From my reading your article does not make it plain enough that there are plenty of examples where the FUM charge is justified for the service provided. (I apologise if I have read you wrongly).

    You call it laziness, but it is also a matter of convenience. If you have a portfolio with a stockbroker they also normally have a portfolio charge and this is invariably taken from the portfolio, rather than requesting a cheque from the client. If clients have the experience of a stockbroker (as many of mine do) then they tend to want the same system.

    In both cases I like to think that the client knows what they pay for and how much it costs in pound terms. To have the Regulator say that some don’t understand percentages is the height of disingenuousness. I have yet to come across someone with over say £70,000 who doesn’t have a good grasp of percentages. Even for people without assets – some understand the intricacies of an accumulator bet (something I have difficulty with) and who is unfamiliar with the bi-annual high street sales offering reductions of 25% or 30%?

    Oddly stockbrokers also charge by percentages and their commission (yes – they still call it that) is also quoted in percentage terms in their tariffs. Naturally it is shown in pound terms on the contract note.

    But it certainly would seem that we don’t exactly have homogeneous regulatory attitudes.

  4. An interesting tale to tell on this – In the mid 1990’s the IFA Association, fed up with the attitude of the ABI, set up a group of providers we called the “Danesfield Group” to discuss industry issues.

    One was Critical Illness definitions which we went on to improve but another subject was renewal commission. In room of 20 provider reps we asked was it a servicing fee? or was it delayed initial commission?

    We got both views some very firmly given. But two started a real heated argument which went back and forth. It was only after 10 minutes banter that I realised they worked for THE SAME COMPANY!

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