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Rob Reid: The trouble with trail

Prices are a strange beast, particularly last week when the price of roses made you think it is flowers and not gold that is the ultimate hedge. We also found out that, in the UK, as in the US, in the words of Sam Goldwyn: “An oral contract is not worth the paper it is written on.”

Last week, Towry lost its case in the High Court to sue Raymond James and seven former Edward Jones advisers for allegedly soliciting clients.

In a previous column, I opined that no one owns clients. More important, so many firms assume they can rely on non-existent or ineffective contracts.

We need to recognise that the self-employed adviser (who is in the majority) will either have to relinquish “ownership” of clients or sell them with non-compete/non-dealing clauses in the sale agreement if principals seek to include their clients and any sale. With the demise of legacy commission, trail or incremental, there is no doubt that the value basis for many acquisitions in the last five years could be fundamentally flawed.

I realise there are only certain conditions where the trail has to stop, in terms of client contact, but do you seriously think that provider call-centre staff will be left with the power to make subjective judgements? No, they will not. Any contact will result in trail being shut off and then the adviser will need to seek re-appointment.

I once gave a talk and said, “small numbers, big problem”. In other words, many renewal commission payments are less than £5 and the cost to refund it is around £30, so if it gets switched off, then it will stay that way. This is a major problem for consolidators and, to make matters worse, this year sees the last year of contracting-out commission, so 2013 will see significant drops in revenue for many firms through this and the cancellation of trail.

If trail is becoming as volatile as the markets, then advisers need to consider an unbundled approach. After all, many of us would baulk at a portfolio that was 100 per cent in equities. Why should any advice firm take a similar approach? The introduction of retainers does de-risk the income stream for an advice firm. This “income allocation” allows alignment of remuneration with the tasks performed.

I would like to close with some observations about the maelstrom of terms such as commission, fee offset, fee-based, fee only, etc.

They are all charges, so let’s stop all the opacity and drop the other terms and talk about charges. Many of the bigger distributors see business as usual, with adviser charging being a rebadge of commission and, given the lack of interest clients showed in commission disclosure, who can blame them.

Robert Reid is managing director of Syndaxi Chartered Financial Planners Twitter: @reidremoney


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  1. Robert, your last line says it all. The total lack of interest and understanding exhibited by the great majority of clients does mean that adviser charging will just become commission rebadged. So apart from advisers needing to acquire a level 4 qualification to carry on advising, RDR is beginning to look like a very expensive rebadging exercise all round. Very very expensive in fact.

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