A few weeks ago, I read a book about China called The Long March. Written by two British authors, Ed Jocelyn and Andrew McEwan, it details the year-long military retreat of 1934-35 by Communist forces as they sought to escape encirclement by a militarily superior Kuomintang army.
Of some 86,000 soldiers who started the march, barely 8,000 made it to safety. Those who survived the gruelling 4,000-mile journey were able to regroup and recuperate in northern China, gaining new converts and eventually mounting a successful campaign to overthrow the Kuomintang in 1949.
The Long March helped cement the reputation of Chinese Communist Party leader Mao Tse-tung despite convincing evidence cited in the book that the story of the march itself was substantially mythologised by Mao and his supporters.
I found myself thinking about the Long March last week after stumbling across an article about trail commission aimed at consumers on the Financial Conduct Authority’s website.
For those who have not visited the FCA’s consumer section, I urge you to take a look. It covers five core areas: banking, mortgages, investments, insurance and pensions. On the investment side, it discusses topics including finding an adviser, questions to expect or ask, how you pay for that advice and – significantly – an article about trail commission.
What the FCA tells consumers is quite simple: “As part of our changes to the way you get financial advice, your adviser cannot receive commission – including trail commission – when you buy a new investment product after 31 December 2012. As a result, we expect products that did not include trail commission before our changes came in … to be recommended by advisers more often.
“However, a financial adviser or intermediary can continue to receive trail commission for advice on investments that you bought before 31 December 2012.”
Under the headline, Tackling trail commission, the FCA recommends three options: selling the investment and buying it back, this time without trail charges; negotiating a better service from the adviser or switching to a new adviser in return for rebated trail commission.
he FCA’s advice is interesting in a number of respects, not least because it assumes an adviser will happily accede to a client’s request to sell any investment held inside an Isa wrapper and then buy it all back as a trail commission-free product. It also goes much further than the Money Advice Service website by telling consumers how to avoid trail-related charges.
The MAS advice says that post-31December 2012, advisers can only charge trail if they are really giving you an ongoing service. But for portfolios predating that, it simply says: “They will generally be allowed to keep earning it on products they have sold before the end of 2012.”
The FCA’s page also shows how serious the regulator is about what it clearly deems to be unearned trail. In an earlier column, I mentioned how the FCA is trying to nudge advisers into forming a new relationship with clients by offering a better service to genuinely earn their trail.
The latest advice on the website makes the point more clearly. It seems that, notwithstanding some advisers arguing that their original contractual arrangements with clients did not include servicing of products in return for trail, the FCA wants it to happen – voluntarily where possible, compulsorily where not.
This brings me back to The Long March, which was born from a series of tactical mistakes by Chinese Communists, not least initial attempts to mount armed offensives against the Kuomintang, which was militarily far superior at the time. Even prior to the long march, political repression in Communist-held areas had weakened support for the party and, according to the authors, helped debilitate the Red Army itself.
What I suspect we are seeing with regard to trail commission is advisers being forced on a long march, where they too will engage in initial resistance to the notion that they should accept new pre- 31 December 2012 trail arrangements with their clients. A minority will refuse to buckle; they will resist attempts to force them to place the old trail arrangements into the same financial pot as new ones. If so, what will almost certainly happen is that, just as the Long March decimated the Red Army, only a few advisers will remain.
The alternative lies with those who have a sensible proposition which accepts that, in future, they will have to deliver ongoing service to earn their trail commission. And that applies just as much to pre-RDR trail as to any new income streams.
Back in 1934, the decision to begin an arduous military retreat arose from a desperate realisation that staying to fight would lead only to immediate obliteration. The march itself was almost as suicidal but it offered a way out for a few survivors.
This time, neither fighting the FCA nor running away from what it wants to see happen are credible options.
Nic Cicutti can be contacted at email@example.com