Advisers still reliant on trail commission should prepare for the tap to be finally turned off by fund groups, say investment experts.
It is thought the “writing is on the wall” for around £30bn of off-platform trail paying assets and advisers are being warned to adapt their business models accordingly.
Last week Money Marketing revealed Standard Life Investments is to scrap trail commission on its entire UK mutual funds range to coincide with the sunset clause on platform rebates in April.
SLI paid trail of either 25 or 50 basis points, but is only reducing annual management charges by around 20bps.
Advisers say the fund group is profiteering from the move, hiding behind a smokescreen of the RDR.
“Spirit of the RDR”
As part of its RDR platform rules, the FCA banned payments between fund managers and platforms and banned cash rebates. The rules were introduced on all new business from April 2014, with a two-year sunset clause on legacy payments between fund managers and platforms.
In 2012 the FSA separately set out rules on when trail can be paid post-RDR, which included paying trail on pre-RDR investment amounts where top-ups are paid into a product, and advice that leads to no change to the product.
But in a letter sent to advisers, seen by Money Marketing, SLI says trail on its mutual funds will stop to “align the way we treat legacy and new business, reflecting the spirit of the RDR”. Standard Life says “the overall financial impact on the Standard Life Group is negative.”
Old Mutual Global Investors says it only has a “very small book of business” which pays trail on off-platform assets. A spokesman says: “We have no plans at this time to take similar measures, although we regularly review charges on all investment funds to ensure they remain suitable.”
Aviva and Aegon also say there have no plans to cut trail commission, while Legal & General Investment Management declined to comment.
A Royal London spokeswoman says: “We will continue to pay existing trail commission to an adviser for as long as we are allowed to under legislation.”
Advice firm Almary Green has trail income of around £2m a year.
Managing director Carl Lamb says: “When I set the firm up 15 years ago it was on a fee basis, or a low initial fee and trail. Our whole business was based on trail, which at the time was forward thinking because a lot of people were still only taking upfront commission.
“So we’ve been penalised for being frugal – we could have taken commission upfront and filled our boots.
“If everyone turned trail off tomorrow, you’d say goodbye to the IFA industry. It is heavily reliant on that commission – probably around 80 to 90 per cent is reliant, including the large networks.”
But research consultancy Finalytiq founder and director Abraham Okusanya says the “writing has been on the wall for a long time”.
He estimates off-platform assets still paying trail are worth around £30bn.
He says: “This has been circling around for so long now, since the sunset clause was announced and the ban on platform rebates.”
Okusanya says the cost to asset managers of administering trail and the strain their systems are under means it is “perfectly understandable” others will follow SLI’s lead.
But he adds: “Typically advisers will have 10 per cent of assets placed directly with asset managers. It will affect a few of them, but advisers are the most resilient part of the retail investment value chain – they will adapt quickly and move on.”
Not so fast
Threesixty managing director Phil Young agrees asset managers are likely to seize the opportunity to cut trail on smaller books of business as the sunset clause deadline looms this April.
He says: “Most providers would like to cut trail and pocket the money if they could. The obstacles are where people have cut it so far it’s been smaller amounts.
“If you cut trail commission where a lot of advisers will be affected there’s a tacit assumption people will get annoyed and move money elsewhere.
He adds: “It’s a trial and error way of testing. It could be the start of something but the strategy among providers is not to do anything dramatic for bigger books of business. If trail’s being paid it’s an incentive for advisers not to switch the fund.”
There have been concerns that Mifid II, which was due to be implemented in January 2017 but is likely to be delayed, would stop all trail on retail investment business.
The FCA says it has no plans to change its current rules on trail commission.
Zurich head of regulatory developments Matthew Connell says: “We don’t see that Mifid II necessarily affects trail for pre-RDR products because of the way it applies – it’s not necessarily retrospective.
“The expectation is there will come a point that if you have an arrangement still paying trail despite the ban being in place for years, you’d have to start asking is this really a situation that is in the consumer’s interest or is it being kept alive for the industry’s interests?”
Currently SLI pays trail commission of 25bps on bond funds and 50bps on equity funds. It is cutting annual management charges typically by around 20bps on its mutual funds, lowering fees for around 90,000 customers.
But advisers have branded the fact not all the savings have been passed onto clients as “obscene”.
Young says whether or not the remaining margin is passed on is a “grey area”.
He says: “Where it’s a big amount of money no-one’s quite sure from a treating customers fairly perspective whether you’re allowed to keep it or pass it on to clients.”
But investment consultancy Gbi2 managing director Graham Bentley says advisers complaining about SLI profiteering “should note their own fees have risen since RDR, from 50bps trail to 75bps adviser charging, for effectively doing the same job”.
Bentley says: “It makes sense in a non-commission environment to get rid of this anomaly. SLI off-platform clients, direct or otherwise, will now have a share class priced the same. No doubt SLI will provide better web-based engagement with customers in exchange.
“And of course, affected advisers should be using customer-agreed remuneration anyway. Their problem will be now having to directly ask the client for a fee rather than having it, less obviously, facilitated via a platform. So I expect most of these assets, if indeed there actually still is a relationship with the customer, will end up on a platform as a result.”
Expert view: Mike Barrett
The announcement by Standard Life Investments of its intention to stop commission payments on its mutual funds was never going to be popular. Advisers are rightly concerned about the impact on their clients and the loss of revenue, but this news should be viewed as a warning shot across the bows. It is likely a number of fund groups will follow SLI’s lead and end trail. A lot of advisers will now be looking at their back book of commission-paying products and thinking that 2016 should be the year to move them to a fee model, before the rug is pulled from beneath them.
For some clients this will not a problem. Their adviser can move them to a clean share class, with adviser fees replacing the commission, and the total cost to the client is likely to remain broadly the same. However, for many clients it will not be that simple. Providers need to ensure they are treating their customers fairly, and there are a number of potential outcomes where the customer might end up feeling this was not the case. It is unreasonable to expect a customer’s total cost of ownership to increase as a direct consequence of this process, and providers initiating similar moves need to ensure this is not the case, especially once adviser fees have been included.
Of course, all of this assumes the client is going to pay for ongoing advice, but an unfortunate consequence for many will be that they find themselves orphaned, with advice fees either uneconomical or unaffordable.
With Mifid II introducing increased suitability requirements many fund groups could find themselves with a large book of non-advised clients, with little or no direct servicing capability. In this scenario providers might be better served supporting advisers, as opposed to disrupting their client relationships.
Mike Barrett is consulting director at The Lang Cat
This is another example of Standard Life stealing commission from advisers. They are now effectively ripping up the contract with advisers, and not even rebating all that money to clients. It’s scandalous.
Yellowtail Financial Planning
Turning off trail has been on the horizon for a long time. Anyone with a bit of forward thinking should be designing their proposition around fees. Standard Life Investments has just broken ranks early.