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Rob Reid: The problem with switch commissions

Rob Reid glasses 150

Watching programmes like Location, Location, Location makes me think of investment properties and in particular the number of IFA firms who own their own property.

Recently, I have had several discussions with IFAs who were selling their firms as a result of their wish to exit before the RDR. In all cases, they owned their own property and to a man were surprised that the purchaser was not interested in purchasing the property.

Now they have to market their buildings and as none are in prime locations selling will be a drawn out affair.

Some of you will see them as taking too much for granted but I tend to reflect on their decision to buy the property in the first instance. Did they do so as an investment or more likely as a convenience that gave them control over rental costs etc? This approach to any investment is not smart and will in all cases result in unfortunate results.

While on the topic of investments, just why is it that some IFAs see switch commissions as acceptable, never mind ethical?

Before I get started, let us consider when it would be acceptable, for example, if a complete re-assessment due to different goals, different time horizons, etc, then I for one would approach my client and explain that I would be charging the same amount as a set-up fee for new money as the time involved etc., was comparable.

To charge on simple switches or in specie transfers onto platforms is not acceptable. I would love to know how many advisers hard disclose these charges when they are often at 1 per cent or more.

This does explain how some firms generate significant profits with little in the way of new money being invested. This may not be churning but it might as well be as the benefit to the client is zero and unless its fully declared those doing this need to be exposed and soon.

The platforms know who is doing this and could control it if told to do so. We need research on how widespread this is but I suspect it is a practice that far too many see as normal.

Disclosure is central to good client outcomes being in line with their expectations. If we don’t get hold of this, I see the same kind of regulations emerging here that exist in Australia where the client relationship is re confirmed every two years.

Perhaps this would be a good development as those firms who have real relationships its no risk but for those who focus on new business to the expense of all else it would spell the end of trail for those firms.

As recent weekends have shown the personal finance press is putting its own spin on the RDR. The idea that IFAs can defer the conversation over these changes until late this year is plain mad.

I remain concerned about firms which have operated commission offset and regard themselves as RDR-ready when in reality they are no more ready than many transactionally focussed firms. Maybe it’s this focus on transactions that leads to the charging on switches i.e. activity for remuneration.

Perhaps the platforms could volunteer the information on those firms taking additional revenue on switches and confirm whether it is widespread or limited to opportunists.

If we want to see advice truly valued we need to charge for what we do and to demonstrate value rather than purely to increase remuneration. If we had a TV show that highlighted the value of the advice perhaps the obvious name for such a programme would be Relationship, Relationship, Relationship.

Robert Reid is managing director of Syndaxi Chartered Financial Planners


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. This is an interesting question which actually poses more than one scenario leaving aside the issue of commissions v fees.

    When is a fund switch ‘simple’ comes immediately to mind? It is in fact a brand new recommendation in regulatory and compliance terms and so carries risk, time and experience.

    It is right that this should be paid for but it is also right that the ckient knows what he is paying and getting, and agrees to this. If the terms of engagement cover this and fund switching is covered then no additional fee is probably due because it is already factored in. If however the client is transactional, then new terms would need to be agreed.

    As a profession, we have the almost unique privelege of having pretty much open ended liability for our advice.

    Imagine if with the best of intentions, one advises a client to switch out of an apparently underperforming fund into one that subsequently fails notwithstanding much more due diligence than apparently the regulators or ACDs carry out.

    Is that simple, should it be ‘free’, is to charge for that unethical? The problem here is the ‘C’ word and transparency. If the client gains a benefit then charging is ethical but commission is an inappropriate method of payment as it is indiscriminate in nature – much work, no/low payment or no/low work high payment.

    Have we done too much for free in the past? I don’t get free beans at Sainsburys just because I’ve shopped there before!

  2. Rob

    You are spot on with your observations and maybe that’s the reasons why the FSA has brought in the standard that you have to make a written recommendation to your client when making a switch.

    There are circumstances when client should switch investments without a shadow of a doubt but this should be done with the full knowledge of the charges involved and not simply to line the pockets of the adviser.

    Disclosure is the key issue here and also making sure that the switch benefits the consumer

  3. The only way isnt Ethics... 4th October 2012 at 6:09 pm

    IF you believe what youre doing is of benefit and valuable to the client, then ethics only apply in terms of how MUCH you charge, not WHETHER you charge, and the “ethical” charge rate is surely highly subjective.
    Isnt the whole point of charging “professionally” that you simply advise what your charges will be for any particular activity that YOU believe is beneficial to the client and if they are agreed then thats fine.
    Its when you start doing and charging for things you know ARENT beneficial or of value that the behaviour itself is unethical. And THAT is the big RDR elephant Im afraid.

  4. Neil F Liversidge 4th October 2012 at 6:48 pm

    We typically charge 3% on new money only plus 0.5%pa. Our view is that the 0.5% pays for switches and we give a written ‘no churn guarantee’. Clients love it and we make a fair living.

  5. Assuming that one is taking or receiving a trail commission or charging an annual review fee, then surely any additional charge is difficult to justify, assuming that we are all talking about funds held on a platform.

    After all, surely a fund switch is a likely ‘tweaking’ action resulting from a review of the client’s portfolio and ongoing objectives. What else are we charging review fees for.

    It’s a different matter If a firm is not deriving any ongoing income from a client, but I can’t believe that happens often, if at all.

    I’m with Rob. If it’s essentially ‘double charging’ it ain’t on. If it’s a fundamental change of direction and objectives, needing a lot more input, that may be a different matter.

  6. I remember the reaction my clients used to have to the old fashioned stock broker who (they thought) on a Friday morning would look at his targets and determine his shortfall to get his bonus. Then would work out how many trades he needed to do to make up for this, make the trades then push off for a long well earned boozy lunch.

    Needless to say the clients paid for the trades and the broker got his bonus. As to whether there was any clear benefit in terms of performance or meeting the client’s goals was never clear.

    I heard recently about an IFA who was switching a lady’s portfolio 3 times a month taking 3% on £250,000 each time. In the same way as the banks use technology to identify unusual transactions to be delayed whilst their fraud team checks it out, surely the platform can do the same?

    If you want a sustainable long term relationship with your clients you must be seen to act in their best interest. Taking fees on fund switches can create a conflict of interests and a better model is to take an annual servicing fee that includes the average cost of your advice, compliance & implementation on any switches you might recommend. If you end up making a lot of changes one year you might be out of pocket but it is unlikely you will be actively switching every year but if your proposition is truly one of active management and frequent fund switches then you might charge more per year to cover it. If so then it is probably worth checking your client total costs against a delegated fund switching such as Discretionary or Multi Manager?

  7. There is one benefit of a small switch – say £50 as a result of a portfolio review. You avoid VAT on the whole client fee if the client does not wish to proceed with your recommendations or your inferred recommendation is that nothing is done!

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