Who keeps the half per cent ‘cancelled’ trail commission? It should be investors.

27th March 2013


With the retail distribution now in force, some product providers have switched off trail commission previously paid to advisers. Lee Robertson, CEO of Investment Quorum argues that if the trail commission isn’t paying for advice in some way, it should be returned to investors.

It is interesting to note that one of the UK’s largest life assurance companies has announced that it is to switch off trail commission to advisers on some of its earliest pension products.  Trail commission, sometimes known as servicing commission is paid to financial advisers for providing an on-going service to their clients.  Typically it was arranged by taking less of a commission up front and is generally paid at around 0.5 per cent of the policy value.  This is causing quite a commotion in certain sectors of the financial advisory community.  The pension company is citing ‘only 5 per cent of policies’ are affected and ‘systems issues’ as the main reasons.  They cynic in me might suspect that these very early policies add up to considerable invested sums and denote a client and asset grab on behalf of their direct sales force.

I should declare here that we have very little of this type of payment within my firm as we have been charging explicit fees for portfolio management for many years.

The new rules generated by the Retail Distribution Review came into force at the beginning of this year and are designed to deliver better outcomes for customers of the financial services industry.  They include better educational standards, an on-going commitment to professional development, and adherence to a specific and measurable code of conduct but perhaps most crucially an end to commissions in most cases in favour of specific consumer agreed remuneration for advisers.

Existing trail commission can continue until a policy or investment is altered or amended and then it will be turned off in favour of consumer agreed remuneration.  The financial press have been right to point out that many advisers were doing little for this on-going trail commission income stream although many advisers have argued that it was agreed at outset as deferred initial commission so they were within their rights to do little.  This seems a little disingenuous on their part however.

This is probably the first of several insurance companies to try this as they come under pressure with falling distribution, Solvency Directives from Europe and the on-going migration of assets from insurers to wrap and platforms which are now much favoured by clients and their advisers for a myriad of reasons including transparency, reporting and on-line tools.

So why am I so interested in this issue with so little skin in this particular commission game?  It is the end policyholder or investor I am interested in here.  As an industry we have often been lamentable at looking out for the best interests of our customers.  If 0.5 per cent per annum can be removed from the charge stream by no longer paying the adviser then surely this should then be removed from the charges applied to the policyholder or investor?  If an adviser cannot convince a policyholder that the service they provide on an on-going basis is not of value to them then the policyholder is perfectly entitled to have it switched off in the brave new world.  However, it appears very old world of the insurance company to pocket the difference for no extra work.  Policyholders and investors need to be aware that this is the current situation and that they are getting no monetary benefit from walking away from their adviser and becoming what is known as an ‘orphan client’ with no access to advice from an adviser who they have disengaged from for no reduction in charges applied to their investments.

Surely the larger organisations should have learned by now that they have to put the customer at the heart of everything they do and not sink to using new legislation to grab a larger share of the on-going charges at the expense of the original introducing adviser but most importantly the investor or policyholder.

About Lee Robertson

Lee is CEO of City-based Investment Quorum, a very deliberately sized boutique financial and investment advisory wealth manager encompassing strong financial planning and discretionary investment management.  A Chartered Wealth Manager, he was recently listed in the Spear’s Wealth Index  as one of the UK’s top twenty wealth managers. He is a passionate advocate of client focused wealth management and is a regular commentator within the national press and TV on financial matters.

You can follow him on Twitter @IQWealth



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