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Trail and tribulation

Debates initiated in the pages of Money Marketing and elsewhere have a habit of petering out after one or two responses in the weeks that follow. Sometimes that is a good thing. The topics themselves are trivial or the responses can be.

However, at the start of another year, it would be a shame if a discussion launched last December by Peter Hargreaves, founder of Hargreaves Lansdown, suffered the same fate. Many of the points he made in his original column, to which I replied a couple of weeks later, are important enough to warrant further examination.

Peter wrote that IFAs were facing extinction, their demise caused by “unacceptable, obscene, leapfrog indemnity commission” being paid by “stupid, irresponsible, incompetent life companies” to advisers for selling their products.

His solution was simple: “Investment products should have a built-in service charge but no initial commission. That would mean that any investment could be taken over and provide remuneration to the person who looks after the client.”

My response was that the issue to be addressed was not just indemnity commission but also trail, so often paid to advisers who do nothing to justify its continued payment. Or, for those conscientious enough, it pays a fraction of what they should earn for the work they do.

In the weeks that followed, I had over 25 emails from various readers commenting on what I said, some for and most against. My thanks to all of you who wrote.

Most significant, for me at least, was an email exchange with Peter. I hope here to offer a flavour of what he said and my responses.

He started by saying: “What you are missing is that trail commission does not come out of the client, it comes out of the management charges that were already being made. It would be naive to expect that unit trust groups and life companies which offer trail would reduce the annual management charges if they did not pay trail.

“I cannot understand why you would not like our model. You do not seem to be complaining that perhaps the life companies and unit trust groups charge too much.

“The trouble in this business is you can start on day one and earn £200,000 in your first year but what you have done is robbed the future. We have what I call quality earnings. That means we can live through thick and thin and we will be always here to service our clients.”

I replied: “I don’t have a problem with the way you go about your business or the business model itself. I just do not think that it is one that can be replicated by the majority of IFAs, many of whom don’t provide the kind of service you do and can’t justify the trail they receive, never mind the initial commission.

“That’s why I don’t believe one business model, yours in this instance, is the salvation for the industry. There are others that are as ethical and work well for those involved.

“As for life offices/other providers, if they offered a ‘plain vanilla’ product, with no initial charges and no trail – with IFAs discussing with their clients how they are to be remunerated – it would lead to providers being forced to justify their charges and reduce them and it would force IFAs to justify their charges, both in terms of initial commission and, as importantly, what long-term service they will provide.”

Peter wrote back: “I really do feel that the only way investors will get an ongoing service is if the remuneration is directed away from being a reward for selling a product to a reward for looking after the client who holds it.”

My reply was: “As I see it, there should be a reward/ payment for giving advice. That can be fee-based or, arguably, commission-based and there should be a reward/payment for servicing the client’s ongoing needs.

If you choose to forego the former in favour of the latter, that is entirely your decision, which I respect.

“But many people use the latter as a way of boosting income without then servicing their client’s needs. To me that is as much of a scandal as high up-front commission.”

Peter’s final comment to me was: “I agree 100 per cent that many brokers take the renewal and do no work for it. However, if it was well known and reported to the clients, they would insist that they are serviced for the service fee that is being received by the broker.

“The real advantage of renewal commission is that another broker can take over a client that was not being serviced, without having to churn the whole lot to make the initial commission. In fact, an important business for us is people transferring investments which have been completely neglected by the ‘wham bam, sell and disappear’ brigade.”

Peter’s last comment in this exchange is one of the most interesting.

He suggests that one reason for the growth of companies such as his own is the failure of other IFAs to meet their clients’ needs adequately.

Personally, I think there is a huge difference between genuine service, which involves meeting the very personal needs of a client, and posting masses of – admittedly first class – published material and a trained helpdesk adviser at the end of a phone.

What do other readers think?


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