Although consolidators are in line to be hit worst by the Financial Conduct Authority’s (FCA) planned ban on legacy trail commission, one acquisitive advice firm has welcomed the change.
Meanwhile other IFA firms have said it is about time the FCA cracked down on unscrupulous advisers who take legacy trail for little to no work.
Many consolidators have acquired large books of legacy business, including books from retiring advisers, and could be hit by the changes.
The regulator warned that some investors ‘do not remember from the point of sale disclosure that they are paying trail commission, or are unaware of the adviser receiving the payments’. This is because advisers can sell their legacy books without informing investors, it said.
But Ian McIver, director of development at Somerset-based Nexus IFA (as of July 2016, Nexus had acquired 25 firms through consolidation, and has around £400 million in assets under advice), said the FCA would struggle to enforce any such ban.
‘There are two ways you can see it,’ said McIver. ‘The general point consolidators will want to make is that legally, it’s a bit challengeable. Whether the FCA is right or wrong, trail commissions are part of a post-retail distribution review legal arrangement, which is sticky ground. I don’t think it will happen, personally, as it’s unmeasurable and won’t achieve what they want it to.’
However, he said it was ‘a great opportunity for firms that have taken on client banks to look at that book and get the clients re-engaged in an active post-RDR framework’.
He said moving on to his firm’s ongoing charges agreement would cost clients more.
‘Our standard [ongoing service] model might be slightly higher but because of the discounts and other benefits we can obtain, it ends up being better for them to stay with us. It’s a great opportunity for firms to say “yes, there is a bit of tidying up to do, but it will be beneficial in the long run”.
‘If those clients leave rather than moving over to a more fitting model, the only winner will be the providers. There will be no tangible benefit for consumers.’
A number of advisers have voiced support for the blanket ban, saying it presents an opportunity to break the link with providers.
Darren Lloyd Thomas, managing director of Haverfordwest-based Thomas and Thomas, said it was ‘unforgivable’ for any adviser to take trail and not provide a service in return.
‘We come across clients who have come from other firms that have had Oeics that have not been changed for four years – no rebalancing and no reviews – and that is just poor,’ he said.
‘Doing something would require the adviser to alert the client that they are paying for a service they may not want to pay for. I am glad the FCA has cottoned on to this.’
Chris Budd (pictured above), managing director at Bristol-based Ovation Finance, said he had seen cases of advisers earning income from trail commission while doing very little proactive work for the clients paying it.
‘There are advisers receiving trail and doing little for it,’ he said. ‘If a client understands what they are paying for what they are getting, then they would also have no problem signing an ongoing charge client agreement. So in a way, any client happy to pay trail should also be moved off it.
‘I remember hearing the Financial Services Authority was planning to ask firms to justify their trail income as part of the Treating Customers Fairly initiative. This was in 2008, three or four years before the RDR. To my knowledge that never happened, which seems a shame now.’
Phil Melville, director of Berkhamsted-based Argyle Financial Group, said it was time for the advice profession to move forward.
He said: ‘The link between the product, provider and adviser has to stop. If the industry is to move forward at all there has to be a complete break of that link.’ He added: ‘Breaking the link with providers is the only way for advisers to stand on their own two feet.’