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The big switch-off: Advisers and platforms grapple with turning off trail

The clock is ticking on the April 2016 sunset clause which will effectively turn off trail for advised platform clients. Platforms that traditionally adopted a bundled charging structure are working to prepare both advisers and clients ahead of the switchover in two years’ time.

For advisers, this means they have less than two years to move advised platform clients onto an adviser charging basis. If they do not take action, not only will trail be turned off but long-standing clients may be converted to “orphan clients” in the eyes of platforms. The question is, how will platforms define these orphan clients, and what do they plan to do with them once they have decided these investors are no longer advised?

How big is the trail problem?

In April 2013 the FCA banned payments between fund managers and platforms and banned cash rebates. The rules were introduced on all new business from April this year, with a two-year sunset clause on legacy payments between fund managers and platforms. Cash rebates can continue in legacy business. All platforms have to move to a totally unbundled charging structure by 6 April 2016.

Standard Life bulk converted clients to clean share classes late last year. But Cofunds, Fidelity FundsNetwork and Skandia are all yet to set out how they plan to tackle the issue of switching off trail and the resulting number of orphan clients.  

Cofunds distribution director Andy Coleman warned delegates at last month’s PIMS conference that if the platform was to convert all its clients to clean share classes in bulk, it would have to turn off trail commission for many clients.

He said: “It would mean we would have 600,000 clients we were not charging any remuneration on and therefore all the market rate trail would be turned off for advisers because our terms and conditions do not allow us to charge the customer a fee. So we could do it but the consequences would be unpalatable for us. We are in conversations with the regulator to say ‘What do you want us to do with clients who are still sitting on our platform in April 2016 and have not been engaged with?’.”

FundsNetwork has told advisers it plans to roll out a phased optional bulk conversion process for advised clients and expects to move all remaining clients to clean share classes in Q4 2015. 

In a note to advisers, seen by Money Marketing, FundsNetwork says: “We realise that you want as much time as possible to move your outstanding clients from commission to fees, and therefore we do not intend to undertake any mandatory conversion of clients’ assets before the latter part of 2015.”

Skandia platform manager Mike Barrett says the platform expects most clients to have moved before the platform is required to intervene.

He says: “April 2016 is the date at which platforms cannot retain any rebate and so customers will have to move from our bundled charging structure to our unbundled charging structure by then. 

This is happening naturally as advisers and customers make changes to their portfolios. 

“For any customers remaining in our bundled charging structure by April 2016 we will be working with advisers to ensure they move into our unbundled structure in a controlled and timely manner.  We have not decided on our exact approach to this but we will do so over the next 18 months.”

The unanswered question for these platforms is what to do with a potentially large number of orphan clients. Money Marketing understands Skandia is considering a number of options, including referring clients to Intrinsic, which parent Old Mutual Wealth acquired in February. Other options are to offer its discretionary fund management proposition WealthSelect, or build on client access to the Skandia platform.

Cofunds says it does not expect any orphans at 2016 and has made no plans. Fidelity says its plans don’t involve taking ownership of client relationships.

The Platforum head of adviser platforms Freddie Findlater says: “It is inevitable there will be some disengaged clients. If there is no instruction for the platform to convert then eventually there is no choice but for the platform to convert them. It is hard to know how many that will affect.”

Skandia says 25 per cent of platform assets remain in a bundled structure and Cofunds has 70 per cent in a bundled structure. FundsNetwork declined to comment.

All three platforms refused to reveal how much will no longer be paid in trail come the big switch-off. 

The Lang Cat principal Mark Polson has put forward a conservative estimate of around £400m, while The Platforum calculates the hit to trail could be up to £780m. Both firms stress it is difficult to be accurate on total trail payments without platform-specific data.

Polson says the sunset deadline will place significant pressure on both platforms and advisers. He says: “It is going to be a bloodbath. We cannot pretend we have not known about it. But I just do not think many advisers are engaging with it properly. 

“It is going to be brutally difficult for providers as well. In effect, the entire commercial business model has been washed away. It is incumbent upon those businesses to get themselves to a position commercially where they can continue to offer good service to advisers and clients. That may have real world impacts on staffing levels.”

Orphans

Perhaps the most significant point of tension will arise around so-called orphan clients.

Platforms face a potential quandary in that those clients that remain bundled have by definition had little or no meaningful interaction with an adviser, since there has been no “advice trigger” for a conversion to take place.

Skandia says it cannot determine which clients have lost their advice relationship through their records and although it offers a client access website, it requires the client to notify the platform before treating them as an orphan client. 

The FCA says it has looked closely at whether firms were prepared for the sunset clause and found that, on the whole, most firms were on track.

But a spokeman says: “One of the potential issues we found was some platforms not doing enough to identify and prioritise their communications to those clients who had found themselves without an adviser to ensure they were made aware of the different options or services available to them.

“Leading up to April 2016, we expect firms to communicate with their clients, including those who may no longer have an adviser, and provide them with appropriate information on the options available to them and any actions they may need to take in good time before the rules for legacy business come into effect.”

Polson warns the orphan client issue could be used as a guise for providers to poach clients. He says: “I have an abiding concern that those providers that have multi-channel businesses, that is an execution-only arm, will have a look at clients which have not had a trigger event for two to three years, decide that those are orphans and that they have marketing rights.

“If the clients are really not getting advice it is fine but there has to be positive disclosure from the clients that they are not getting advice. Because no changes in two years could just be evidence of a well set up financial plan which did not require changes and therefore did not trigger conversion.”

Bradbury Hamilton managing director Sheriar Bradbury warns advice firms risk a shock if they allow providers to take ownership of the client relationship. 

He says: “The industry has so far been cagey on how they plan to tackle orphan clients in the run up to April 2016. We know behind the scenes that providers are writing to clients on their books to assess whether they have had any communication from their adviser.

“But the move by Cofunds is the most direct move we have seen in terms of  getting the ball rolling on what in effect is a question of who owns the client. 

“Advisers who don’t tackle the problem now by working with providers and communicating with clients may find themselves in a vulnerable position.” 

The countdown to trail switch-off

April 2013 : The FCA announces ban on payments between fund managers and platforms and cash rebates  

August 2013: Standard Life confirms it will move all platform assets to clean share classes

September 2013: Rival platforms hit out at Standard Life, arguing platforms should be allowing advisers to decide when to convert. Skandia, Fidelity and Cofunds all commit not to carry out a bulk conversion for the foreseeable future

December 2013: Standard Life conf-irms completion of bulk conversion

April 2014: Ban on platform rebates comes into effect for new business

April 2016: Ban on platform rebates comes into effect for legacy business, effectively switching off trail relating to advised platform clients.

EXPERT VIEW: Freddie Findlater

Findlater

The sunset clause, when first announced back in April 2013, felt a little like “tomorrow’s problem” for platforms and advisers amid other, more immediate challenges presented by the paper. 

One year further in and following the implementation of the rules for new business, trail commission is back on the agenda – and time is short to meet the regulator’s deadlines.

The goal is very clear: platforms will have to be paid by a platform charge disclosed to and paid directly by the end-investor for all business, including legacy. 

Implementing this rule is a challenge. On the whole, last year’s announcment was no great surprise to much of the market and when the initial rules for new business were implemented on 6 April, platforms and advisers were generally well-prepared. For some, it was just business as usual, but these were advisers dealing with engaged clients.

The sunset clause on legacy business is a different matter. A significant proportion of income that comes from trail is linked to inactive client relationships. This presents a challenge for advisers, who need to demonstrate an ongoing service for an explicit fee.

A typical scenario that is common across many adviser practices might be a client who has bought a product via an adviser 10 to 15 years ago, but has not maintained ongoing contact with that adviser or advisory firm. 

Unless an adviser can provide a service for that client by April 2016, that client could find themselves ‘orphaned’ – and some platforms will have direct-to-consumer options for these clients if they are called upon.

At the moment, many platforms are leaving it to their advisers to switch clients to clean share classes. But as the 2016 deadline approaches, platforms might need a ‘plan B’, and very few have offered up what this alternative might be.

Freddie Findlater is head of adviser platforms at The Platforum

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. What a mess the so called regulator has created! When I discuss this with my long standing clients they all say that had they been consulted about how they paid for advice their preference would have been to retain commission, but with upper limits per investment type. It seems those who decided to control the financial services industry have actually destroyed it for all ‘ordinary’ folk.

  2. I would imagine that will be the least of the problems.

    If these new pension proposals hit the ground and these collective schemes are taken up by the majority – allied to AE- then pensions advice could well become a thing of the past – or the preserve of the very wealthy. You may have to survive for a good few years until those daft enough to have entered these schemes realise what an inferior product they have got. Just be careful that you don’t get involved with it – the compensation will eventually be huge.

  3. Test Comment Ignore

  4. Thanks to RDR we have lost 9,000 advisers of which a gross 4,000 were from IFA DA/Networks.

    How many more advisers will give up when this ban comes in?

    I am tying to find that out via The Heath Report.

    If you are an IFA can you go to http://www.theheathreport.com and fill in the survey

    G

  5. Derek Bradley ceo Panacea Adviser 5th June 2014 at 12:53 pm

    Following our recent survey on trail and the snapshot poll we did late last year, I can report that we had a meeting with the FCA to discuss adviser concerns.

    The meeting took place with Clive Gordon- Head of Investment Advisers & Platforms Supervision, Richard Taylor- Savings, Investments & Distribution Policy, Risk & Research and Michael Newton from the Long Term Savings sector.

    It is interesting to note that Richard is tasked with looking at unintended consequences of RDR. He did a lot of writing during the session.

    From our corner, we had Garry Heath, Lee Travis from NMBA and Sarah Paul and myself from Panacea Adviser.

    Sadly we only had one hour of time allocated by the FCA but I do believe we did get some of their attention around a number of key issues.

    In particular we wanted to ensure that there was a clear understanding of what trail actually is, what it means and why it is so important, especially to firms with many years in business.

    We wanted to ensure that trail from legacy products was not removed and that some clarity was given around this subject as it is the view of many that it is only a matter of time until either the regulator or the providers remove this.

    The FCA sees trail as being something that should see an ongoing service, this is not necessarily contractually the case with legacy trail, especially where firms did not take initial commission although some purists may take a very different view.

    It would be fair to say that many of the possible consumer detriment issues we highlighted had not been seen until now. Neither had the impact that removal may have on the viability of adviser businesses as well as the almost complete destruction of embedded value being amongst them

    Garry made some very powerful representations based on his current and past experiences and was rightly critical of APFA, who many see as not having stepped up to the plate when it was most needed.

    Strangely, the FCA don’t believe it is their responsibility to help advisers communicate to clients the impact of regulatory change but accept they need to more clearly communicate to advisers and accept that there can be confusion with clarity of some of their communications with the caveat that some empirical proof should be provided where possible

    We agreed a number of steps need to be taken, Clive Gordon was very keen to make the point that the FCA was not about to unravel RDR, and that they would not guarantee that they would make any changes in regard to concerns around trail removal…… but they did say they would listen, and would want to meet with us again on a regular basis.

    And that was a starting point.

    They also made it clear that they want to move away from FSA way of doing things.

    Actions to follow included an intent of working with the FCA to create an adviser guide around trail matters clarity, because trail matters a great deal.

    The outcome is that we have created a free to download guide, almost complete and to be issued very soon, that does make sense of much that was not clear. The FCA have insisted that we should not, whether directly or indirectly, suggest or imply, that the FCA has approved, commented upon, or been involved with the production of our guide.

    So it will be clear and easy to understand.

    Result:)

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