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Nic Cicutti: Trail should go to the adviser or the client

Whatever the legal small print, the principle involved is simple.

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A couple of weeks ago I wrote a column about the collapse of Ivan Massow’s trail-rebating firm, in which I revealed my long-standing disquiet about his business skills and called on him to donate any future trail payments to charity.

Massow has since said he will make nothing out of any ongoing trail payments and the business is being transferred to a new rebating firm, Clubfinance.

At the time, I also wondered whether some of the schadenfreude being directed at Massow was entirely free of homophobia. Perhaps predictably, the response of most people who commented online or emailed me was to protest that no such thought had ever crossed their minds.

As always, it was a totally different reaction that made me think the hardest. It came from Gill Cardy, IFA Centre supremo, who wrote: “Why is it all down to Ivan Massow to do the right thing?

“Why does no-one expect the fund managers to repay unpaid commission to their investors – or to reduce fund charges, or switch them to the clean share classes that are appearing like a bad rash everywhere we look?

“Until product providers are forced to do the right thing, investors who don’t want our advice will never be better off – and those who do will end up paying twice – once through product charges and once through adviser charging.”

My answer is in two parts. The first is that at the time of my column, Massow had specifically said his firm would be keeping 100 per cent of the trail previously rebated back to the client.

Under such circumstances, my gut feeling is that – if she thinks it through – wrong though this might be, Gill would probably feel it inappropriate for a provider to intervene and announce it is retaining the trail so it can be paid directly to the consumer after all. Once a provider does that, what’s to stop it intervening against any other IFA firm which has got up its nose?

However, I agree with Gill that if an IFA business closes – particularly one where trail commission was paid in return for a specified ongoing service – product providers should not be able to retain those trail payments.

That money should be immediately rebated back to the client. The provider should also be informing him or her of the benefits of going to another adviser and offering the option to find a new one through, say, unbiased.co.uk.

And if the provider claims it does not have the software systems to deliver those payments direct to the client, one should ask how it is that its technology previously allowed it to pay the money to the adviser.

Yes, there’s a difference between one macro-payment to the IFA and hundreds of payments to clients, but the information needed for reconciliation is already in place. If necessary, the adviser’s former clients could be invited to opt in to receive those trail payments and provide any additional information, such as bank details, required by the provider.

All of which brings me to the issue of Friends Life, and its decision to scrap trail commission payments to advisers on some of its bonds. I strongly believe the decision to be morally wrong.

Of course, I want as many advisers as possible to move over voluntarily to a new vision of advoser charging, whereby it is no longer an ongoing payment requiring no service but one where their clients receive some support with respect to that product.

I fully appreciate Richard Eats’ explanation in Money Marketing last week, in which he wrote that when it initially became widespread in the mid-to-late 1980s, trail “was never a payment for service. It was always to generate sales and by so doing helped both fund managers’ sales and the growth of the advisory sector”.

But we all know that assumption has changed, whether advisers like it or not. Today, the FCA wants trail to be seen as a payment linked to service. Actually, in the long term it would be beneficial for advisers if they saw it from the FCA’s perspective too.

A healthy client bank they can continue to grow by offering ongoing advice has got to be better than a half-dead one in which payments are always at the mercy of whoever manages to make a greater success out of a trail rebating business than Ivan Massow did. And make no mistake: in due course, someone will.

Again, back to Friends Life and the possibility of other providers engaging in similar trail-grabbing moves: IFAs are right to be angry. And they are right to be warning Friends and others of the potential long-term damage to their credibility with advisers if they persist with such a move.

But the FCA, not to mention the Financial Ombudsman Service, should also be looking at this kind of situation. Whatever the legal small print, the principle involved is simple: that money either belongs to the client
or the adviser. Withholding it from both is not acceptable.

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

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. Advoser charging? You’d expect a pro journalist to be able to spell?

    Or is this a new charging structure from Nick Bamford? ;o))

  2. ‘At the time, I also wondered whether some of the schadenfreude being directed at Massow was entirely free of homophobia. Perhaps predictably, the response of most people who commented online or emailed me was to protest that no such thought had ever crossed their minds.’

    So that thought was foremost in your mind then?! Oh dear!

    The reason it should have predictable Nic is because it was not in our minds! I cannot believe that you have owned up to this in print! Shame on you and MM for letting this go to print.

  3. May I remind Nic – and Friends etc – that under English law commission belongs to the adviser.

    In Scotland it belongs to the client until payment to the adviser is authorised.

    Perhaps some thought should be given to the legal status of regulatory diktats and provider land grabs.

  4. Providers had 4 years warning that RDR was coming and in my opinion this was more than enough time to develop systems adequate enough to cope with adviser charging.

    In my opinion the FCA needs to force providers to do the following across all products, including old policies:

    1. Trail commission should be transferrable from adviser to adviser.

    2. Trail commission should be able to be turned on and off depending on whether a service is being provided.

    3. Ad hoc adviser charge including amendments to ongoing trail should be allowed even on old policies as many consumers do not necessarily have the funds to pay for advice.

    4. FCA to take action and fine institutions that are found not to have adequate systems in place and to enforce present regulations that clearly state that firms should have adequate systems that meet present market conditions.

    Martin Wheatley has spoken a lot this week about the advice gap, until the FCA recognises that advice has to be paid for no progress will be made on bridging this gap.

  5. @Peter

    So please tell us about your knowledge of internal systems within life companies, how they can reliably transfer databases from one system (potentially written in the 80’s) to another (potentially written in the 2010’s) without causing loss of data, changes of policy details and terms and all the while keeping the data accessible for audit and client access purposes?

    It really isn’t as easy as everyone thinks, or all the aggregate companies would have consolidated all their systems already to reduce costs and ease of administration the might even be able to give bonuses to those with profit bonds!

    New Business yes these changes are fine, historic..for some polices close to impossible.

  6. So if it’s not that easy, why did we allow the mergers in the first place?!!

    To my knowledge there has always been rules about having adequate systems in place and most of the mergers in financial services including bank mergers have been sold to share holders on the ability to be able to build adequate reliable and cost effective administration systems.

  7. To client or adviser, not provider. Otherwise it is just another ‘management fee’ by the back door.

  8. “If the provider claims it does not have the software systems…”. The problem is not that we cannot swtich off payment of the trail commission. The problem is the trail is wrapped up in the charging structure and we can’t untangle it without (costly) upgrades and give it back to the client. I agree it would be unfair of us to keep it so we would rather keep paying it to the advisers under the original terms of the policy. Obviously this only applies to pre RDR products (when such things were not an issue), for post RDR products we will indeed switch it on and off as required.

  9. @Peter Herd

    There are rules about ‘systems and controls’, not to be confused with any specific requirements about IT systems. Preventing a merger or company purchase because IT systems were not compatible would clearly be absherd.

    On the subject of the time providers had to prepare, this is a complete misnomer. The detailed rules affecting what they could and could not do were not published until very late and in some cases in September. What were providers supposed to do? Build systems for every eventuality regardless of cost?

  10. Is it possible that the decision by Friends Life to turn off trail commission was partially influenced by homophobia? Some of the advisers and clients disadvantaged will have been homo/bi/omnisexual, after all. Why has Friends Life never officially denied that it is institutionally homophobic?

    (And if they do deny it, then ah-ha! it’s because they do protest too much, and there is clearly something dark and primeval at work. Muck-slinging – it’s the new zumba, anyone can have a go.)

  11. To Grey Area

    Come off it, are you seriously telling me that providers have no idea what was going to happen to trail commission post RDR? pull the other one it’s got bells on.

    The fact is providers have been merging and not updating systems and now they’ve effectively been caught with their trousers down. This is not an adviser problem this is a provider problem and I really wish those working in the media would get their facts right when reporting on trail commission.

  12. Several years ago I was privy to a behind the scenes expose of the systems and controls in play as CU became GA became NU became AVIVA and I can tell you that the last thing these leviathan financial organisations do is look at systems and controls. They are driven by accountants after all.

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