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On the trail of commission strategy

The caricature of the commission-hungry IFA is an image that the industry sometimes struggles to dispel.

Not only has Ron Sandler, head of the new Treasury review into retail investment, given notice of his intention to examine what he has described as the “ambiguities” inherent in distribution, but the subject of commission is used repeatedly to disparage IFAs in the national press.

Most of this is directed at indemnity commission but IFAs are increasingly moving towards trail commission. While many IFAs are looking at the option of charging fees to avoid the poor image that commission has been accumulating, trail does provide another option.

For IFAs, there are two main aspects to trail commission to consider. First, there is the impact it has on the IFA&#39s relationship with the client. Then there is the way that trail commission allows IFAs to have a different stance towards their own business.

On the first front, Berry Birch & Noble group marketing manager Stephen Ingle-dew believes all that trail does is allow flexibility between IFA and client.

He says: “The days of an IFA saying you can have any colour as long as it black are long gone.

“With trail, it is a case of the client sitting down with the adviser deciding together how and how much they want to pay. If the client just wants his finances to be sorted out on a one-off basis, then trail has no place. However, if people want ongoing service and advice then it clearly does.”

What IFAs are agreed upon is the necessity of having an open discussion with client about remuneration together with total transparency about charges. One of the attractions of trail commission is it facilitates a discussion on whether the client wants to pay fees or take the commission route. If the client chooses the later, trail facilitates ongoing service without payment of fees.

Aifa director of policy and technical services Fay Godd-ard welcomes the move to trail. She says it provides a clear way of explaining to the client what is being done in return for the commission. “By spreading the commission about, it is easier to equate it to the cost of advice. It is also a big incentive to retain your clients,” she says.

This is a point picked up by Torquil Clark investment strategist Philippa Gee. She sees no disadvantages to trail commission but she does stress it is in return for a service. “In return for trail, the IFA has to look after the client or he will simply go walk about. This is a service industry.”

If trail commission allows a flexible relationship with the client, it also gives the IFA some leeway in the development of the business.

Plan Invest joint managing director Mike Owen points out that with the current uncertainties and pressures on IFAs, trail commission plays an important role, particularly as most IFA businesses have little money in the bank or intrinsic assets.

He says: “Trail commission builds the value of the business, providing real income. It gives financial muscle to the company and means it does not have to worry about writing business every day.”

This is supported by Gee, who says that basing business on indemnity commission alone has the problem in that the up front payment gets used up quickly.

In the current environment, trail commission does provide security, if not an absolute guarantee (after all the client might withdraw from a contract) of continuing income. A business with substantial trail commission enhances value, not in the sense of assets for capital adequacy, but in allowing the business to be sold on. At present, there are some IFA businesses that have little in the ways of assets. Older IFAs wanting to retire will particularly feel the impact of the lack of value that a business built primarily on up-front commission might have.

Trail has become the subject of controversy as a dispute broke out between some of the fund management companies and discount brokers, who were rebating trail commission.

Many fund companies insist trail is not optional but an integral part of service.

Gee says she has another issue with rebating trail. “It is a cause for concern as it would take a considerable amount of administration to carry out the rebate. It is very expensive for the small amount involved.”

She dismisses rebating trail as a long-term proposition and says Torquil Clark&#39s discount arm does not do so.

When is comes to defining what trail commission is, there are varying interpretations and some freedom for IFAs to negotiate terms. Most usual is to get half the initial commission with 0.5 per cent a year of the value of funds.

Gee points out this has another uncertainty – as stockmarkets fluctuate, so do the value of the funds and hence the trail.

While traditionally trail has been a form of remuneration for the sale of Peps and unit trusts, it is becoming available across the board. Even on mortgages, with Yorkshire Building Society planning to offer renewal commission in an attempt to reward brokers for their loyalty.

But in offering trail commission without a concrete service in return, it might further fuel the debate on commission.

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