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 firstname.lastname@example.org