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Nic Cicutti: In defence of trail commission

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Will advisers and their trade bodies need to go to the barricades to defend trail commission? The possibility of this happening has been raised, according to Money Marketing, by the revised Markets in Financial Instruments Directive.

A story by MM head of investment news Laura Suter raised the issue last week in an article on new financial regulations from the European Commission, due to come into force in January 2017. The relevant section of Mifid II apparently states that restrictions on “fees, commissions or any monetary and non-monetary benefits” from third parties such as product providers will be considered “appropriate” under the new rules.

No technical note has been issued to accompany Mifid II, and this is not expected for another couple of months. Nor is the FCA so far planning to issue new guidance on trail beyond its current rules. However, experts Laura has spoken to are in little doubt that these rules could spell the end of this system of remuneration.

According to law firm Clarke Willmott partner Philippa Hann: “On the face of it, it will bring an end to trail commission to those offering advice on an independent basis”.

Investment Association retail markets specialist Mike Gould told MM: “I have discussed it with a couple of legal firms and that’s their understanding as well, it’s pretty much certain – subject to any change by the Commission.”

This is all speculation, of course. It could be that any technical guidance is less severe, perhaps through the use of a grandfathering clause. Or perhaps the FCA will argue there is a public interest in retaining trail in its current form, especially as evidence – also in Laura’s article – points to the fact that its use as a distinct form of remuneration is gradually decreasing for many firms.

Either way, what Laura has done has been to shine – once again – a light on a form of adviser remuneration which, like full upfront commission itself, deserves to die out in its present form as quickly as possible.

Let me be totally clear about this: I do not have a problem with the concept of clients paying a proportion of their investments under management to the adviser who is looking after them.

Properly used, trail can be an excellent way for a client to meet the cost of having someone manage their finances, servicing and reviewing their portfolios on a regular basis.

It is not perfect, of course. For many advisers, the small size of that portfolio means the ongoing trail is itself miniscule and does not compensate for the servicing work involved.

In other cases, although less and less the case nowadays, it was originally used as a form of deferred remuneration: instead of a fee or initial commission, the adviser opted to take trail payments during a product’s lifetime instead.

But in the right context, trail can be a fantastic way for an adviser to engage with clients and establish a lasting relationship with them, by stating clearly and in advance what he or she will provide in return for that regular payment.

For conscientious advisers, it also offers the potential to grow a business: talking to your client once or twice a year about how their financial plans are progressing allows you to offer further tailored advice, which may include adding to the existing investment portfolio.

One of my former advisers was incredibly good at this. Every year we would have a detailed review meeting in which I would be brought up to date with my portfolio’s performance and the extent to which I was on target to meet my plans, or otherwise.

If I was able to, I would also top up my existing investments, sometimes significantly and at other times less so. The “fee” for this service came largely out of the trail earned from my investments. Over time, these grew into the low six figures, justifying our mutual trust in both the advice and service I was receiving.

The problem for me came when this adviser’s firm was taken over by another which boldly stated it specialised in a fee-paying structure, while simultaneously raking in a huge chunk of its income from the trail earned off portfolios like mine.

What was new in this process was that trail in this instance was seen as deferred income – and it was at this point I discovered the service I received from my previous adviser, who had now left the new firm, had been entirely discretionary.

There was no legal obligation on the firm taking over the old business to continue with this service, which was totally unwritten in any contract I had with my previous adviser. If I wanted my account to be serviced there would be an hourly fee for this. In effect, I was getting the worst of both worlds.

Since then, I have taken steps to alter my relationship with advisers. I pay for each piece of advice I receive – but my ongoing trail payments are far, far smaller.

Despite this, I remain a tentative supporter of trail commission, as long as it is used properly and in the way I have described – and if providers hand back any unearned trail back to the client.

If it is, I will be happy to stand shoulder-to-shoulder with advisers, defending trail against Mifid II. See you on the barricades, comrades.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk. Follow him on twitter @NicCicutti

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. It’s a difficult situation … firstly there is terminology. Trail, renewal, level commissions are often ‘lumped together’.

    Secondly, the justification for these commissions vary – are they deferred initial commission, are they taking to deliver a service which is provided, are the taken to deliver a service which is no longer provided?

    The danger of making wholesale changes is that good old issue of ‘unintended consequences’. We have cases where the cost of advice on GAR pensions has been swallowed up by the provider leaving the client to pay a fee for something already costed into a product.

    There is also anecdotal evidence where trail has been turned off but the cost of the product has remained the same – legacy systems being the culprit, the client (assuming ongoing advice is being provided) the likely ‘victim’.

    As an adviser (and the business I work for) there is only a small proportion of our ‘ongoing remuneration’ coming from ‘Trail’ however some investments – Bonds being the best example – pay us ongoing commission for ongoing advice whilst (for pre-RDR cases) not impacting on the withdrawal allowance.

    The danger is that wholesale changes will not be in the client’s best interest – particularly where older, inflexible contracts are involved (often, still in force given that they are in the client’s best interest).

    If Trail commission is turned off and the provider simply leaves the client paying for something they are no longer receiving, I fail to see if this is in the clients best interest.

    If Trail commisison is turned off and the cost of the plan is reduced accordingly, then apart from a load more hassle, there is no real detriment to the client (but there is a time cost to the adviser).

    Ultimately, the FCA needs to perhaps consider the rationale behind such steps and consider how this is achieved whilst minimising the impact on clients.

    RDR was a breeze, the issue has been the subsequent unbundling of charging that has caused the most cost/inconvenient and I see this as being another massive administration issue if there is a wholesale change the legacy ‘commission based’ products.

  2. I forgot to mention (!) that providers can see Trail as being their cost, not the clients – further muddying the water!

  3. I have just requested a cup of sweet tea and may have stay in a darkened room for the next hour. Cicutti supports a Libertatem position!

    The Heath Report 2 survey showed at best that 22% of advisers’ businesses were at risk due to changes in Trail. At worst it could be 44%. Lets average it at 33%

    This is seriously dangerous not just to those that may walk away but also those who are left. Lose 33% of the sector and the costs of regulation and compensation will be split across a smaller number of advisers.

    The details of MIFID 2 has not been decided and we have the Government Advice Review – why continue with the 2016 Trail deadline? To save FCA’s face – the same reason that RDR was not axed.

    See the full story on The Heath Report 2 at http://www.libertatem.org.uk/downloads

    Nurse the screens!

    • As Gary says, the TSC asked the FSA to delay implication of the RDR by one year. I was one of the advsiers who argued for that delay, not because I was anti RDR, but because a lot of firms still needed one more year to adjust and co-ordinating with Europe would have made sense.
      2 1/2 years on from RDR 3/4 of my firms earnings come from contractural ongoing services we provide our clients, many of them agreed 3 or 3 years pre RDR as customer agreed remuneration (later renamed adviser charging), we have very little business which pays us commission and those that do, tend to be policies my firm didn’t even arrange which we have inherited, but are not sensible to move on to new terms FOR THE CONSUMER! Turning off trail for them will disadvantage our clients, btu make NO difference to me or my firm, we charge the same fee whatever, it is just what is available to offset it may change and the provider may benefit requiring the client (after advice) to make a decision on whether to take a short term tax hit (often offsetable by other actions), to get away from a dinosaur life company.

  4. I must have missed something.

    Under CAR, provided the clients signs an authority with the platform, the adviser funds under management charge can be paid by the platform. This then is NOT commission but an agreed fee. So where is the problem?

    As Nic points out the problem arises when greedy buggers want to charge on top.

  5. Bond providers (pre_RDR) entered into a contract when advisers placed business, with trail commission being one option, and it’s open-ended.
    Should that trail be turned off, I’ll be off to court for sure.

    • Yes, but Scottish Widows/Clerical Medical contracts allows them to turn off ALL trail if you stop placing new business with them, with no rebate of charges to the client. A good reason NOT to have placed any business with them as it potentially compromised independance

  6. A well considered and balanced article, Nic.

    • Nic must have been taking some happy pills. Comments on this article likely to be low as a result Nic, so you’ll need to write something to wind us all up again for next week to get the advertising hits up 🙂

  7. I wish to make it clear that my position has nothing to do with Garry’s/Libertatem’s. My view is that trail can be sued as a mechanism for genuine ongoing service of a client’s financial needs. The level of service should be clearly outlined and the charge for it negotiated and agreed. Libertatem’s view is much more along the lines that trail is the God-given right of an adviser who need not – and often never does – do anything more in respect of a client other than pocket his or her money.

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