IFAs are about to become the target of a concerted campaign to persuade their clients to channel their trail payments to a firm that will rebate it back to them.
The campaign is being organised by Intelligent Money, a new company run by former Willis Owen marketing director Julian Penniston-Hill, who believes that most IFAs do little to deserve ongoing commission. Over the coming weeks, he will appear on radio and TV urging clients to sign over trail commission to IM, which will rebate it back to them for an annual fee of £35.
Perhaps more important,he will also be asking people to provide an assessment of the financial advice they have received. The results will be put on a map on a free website that IM is launching, putting IFAs under public scrutiny like never before.
But Penniston-Hill insists that he is an advocate of financial advice. His only issue, he says, is the way that advice is paid for. He says: “Everyone thinks that initial commission is the big expense – it isn't. We just want to educate people that paying fees is better than commission. IFAs want to be seen as professional but if you sell products and get paid commission, you are simply a salesman.”
Penniston-Hill says a 25-year old paying £300 a month into an Isa would have paid £92,000 in trail commission by the time he or she is 65. This, he argues, is just an example of the way that people – no matter how much they contribute to schemes – overpay for a straightforward service.
But does his argument hold water? Do IFAs and salesforces deserve to be so maligned? According to retail fund distributor The Money Portal, the answer is yes. Managing director Richard Craven argues that “Ninety per cent of IFAs do nothing in the way of ongoing admin. There is a lot of greed out there.”
But this view is widely dismissed by IFAs and providers. No one doubts that commission is unpopular with the regulator but few question that it is an essential – and well deserved – part of the business models of respected firms.
Schroders head of UK retail Robin Stoakley says: “I completely disagree with the principle of IM's idea and do not support any such initiative. The vast majority of IFAs we deal with do an awful lot of advising and portfolio monitoring for clients, which they need. Trail is paid to allow advisers to continue monitoring and advising on a non-transactional basis.”
That is key for many IFAs – how can they service clients without some kind of ongoing remuneration? The point that Penniston-Hill is making is that they do little for their money but he offers no evidence for this, simply saying that good IFAs should be equally as keen to punish and expose the bad as he is.
There is little doubt that some people will be persuaded by his campaign – which is being assisted by PR guru Max Clifford – and will divert some trail to IM.
But this will leave them with portfolios that are no longer being monitored and attended. Unless they pay someone to do that for them, thereby negating the point of the exercise, they will have to perform that role themselves. Therefore, the move, according to IFAs, will only appeal to those customers who are comfortable handling their own finances – in other words, the sort of people who do their own research and go to a discount broker to get the best price.
Whitechurch Securities investment director Gavin Haynes says: “Most people need advisers to review their portfolios. It would only be useful for out-and-out execution-only customers – for those people who do not want advice and guidance from an intermediary. But obviously, those people would be using a discount broker anyway so would already be paying reduced charges.”
As discount brokers rebate most or all initial commission, a large-scale move to IM could leave them without the income on which they survive. But, despite this, not all discount firms are totally unsympathetic to Penniston-Hill's argument.
Chelsea Financial Services managing director Darius McDermott says: “We do not take any up-front commission on Isas and Peps and we rebate the vast majority of it on unit trusts and Oeics. We live mainly on trail and for that we give strong after-service care. But for clients who are not getting portfolio reviews and the like, Penniston-Hill's offer has merit.”
But how many people would opt for the rebate option even if they were getting adequate servicing, simply to save money? These customers would be better suited to fee-based advice but in many cases would rather not shell out the money, which will always be a problem for the less wealthy clients who often need to save most.
Penniston-Hill, who calls IM “the Easyjet of the financial services sector”, estimates there are 38 million people in the UK who would be better off through his scheme. He hopes to have attracted 0.01 per cent of them – 38,000 people – in the months following the launch of his campaign, which he thinks is a realistic target.
If IM is a success, he intends to roll out an insurance version of the scheme which could put IFAs under even more pressure. But no matter how high-profile IM becomes, the point remains the same – clients need advice and portfolio monitoring and they cannot expect it free. Those who believe their portfolios will take care of themselves could soon be in for a rude awakening.