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RDR rules stipulating trail commission be passed on to the client when they switch adviser will "devalue" IFA businesses in the eyes of consolidators, Buckles CEO Nigel Speirs says.
In its March Policy Statement, 'Distribution of retail investments: Delivering the RDR', the FSA said a decision on whether trail commission continues to be paid to the previous adviser or can be switched to the new adviser should be determined by the previous adviser and the product provider.
But it says where trail can be switched, it would "expect" it to be paid to the client, "given that the new adviser did not provide the service for which the commission was payable".
Speirs says the loss of ongoing income - which some consolidators say represents the true worth of an advice business - will devalue IFAs.
"When you buy a client bank you buy the right to multiple renewals," he says. "But after 2012 we won't be able to take renewals and this will devalue all IFAs.
"This will have very serious implications for adviser firms and I expect most IFAs will be up in arms."
The impact on firms looking to acquire IFAs will be negligible prior to 2012 but substantial thereafter, according to Speirs, marking an important shift in business practice.
"This means after 2012 firms can only value businesses according to what they can transfer across in terms of service fees," he adds. "Acquisitions will be impacted by the RDR policy statement and people will have to think about how it will effect valuations."
"I am talking to a lot of IFAs and they agree it will be a real challenge, requiring new service agreements with clients."
However, Speirs says Buckles will continue its strategy of buying the businesses of retiring IFAs.
He says he expects to complete a deal with a "long-standing" investment business within the next four weeks, with "two or three" further deals in the pipeline.
Meanwhile, Speirs will be making his television debut tonight on BBC Wales at 6.30pm when he will be talking about the policies of the political parties on financial services.
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Cynical
The cynic in me also suspects that this will result in more business being churned when an adviser moves to a new firm or a client changes IFA. This would obviously be to the detriment of the client. Way to go FSA! Another unintended consequence results from poorly thought out legislation.
Posted by: The Dark Horse
Disaster in the Making
As an IFA that has spent the last 10 years taking lower intial commission income in order to build ongoing income and try to increase the value of my business - I find this incredibly frustrating and disappointing. As usual I will take the blow and say thankyou. What also concerns me is that if this is implemented, it will be moments before a 'Money Tips' site suggests everybody 'sacks' their adviser and demands the trail is paid to them direct.... a cunning plan indeed - until they realise that means no more reviews or access to financial advice unless they pay new fees (out of their net income) even if they CAN find an IFA that managed to stay in business. How sad that some sections of our society know the price of everything and the value of nothing...
Posted by: Lady Jane
Beg to differ!
New service agreements with clients will be a fundamental part of the post RDR scenario. Clients and their advisers will agree the on going fees and how they should be paid. That the FSA expect trail fees to be paid to the client, is consistent with the aims of the RDR, but their reasoning ("given that the new adviser did not provide the service for which the commission was payable") displays a lack of understanding of the purpose of trail fees. The trail fee is not a reward for some past transaction, but a contribution towards the intermediary's current cost of servicing the product. It is currently normal practice to transfer trail from adviser to adviser as the client decides, although some providers are known to block it. However, in the light of the 'fees only' future, if the client does not wish to pay servicing fees from his/her pocket the new adviser will simply obtain the client's instruction to the provider to deduct a servicing fee from the product. This fee can be at any level the client and adviser agree on. So all product provider will be obliged to comply. This increased control in the hands of the adviser and his/her client should boost values of practices post RDR.
Posted by: Mike Stafford
left hand and right hand
Agree wholeheartedly with the other commentators - and Nigel. Here we have a clear case of the FSA's "two hands" coming out with statements which clearly contradict each other. On the one hand we have the "TCF mob" saying that ongoing remuneration should only be taken where an ongoing service is provided. Then on the other hand we have the "RDR mob" leaving the decision regarding any trail with the existing IFA - who is obviously no longer servicing the client! WELL DONE FSA, you have excelled with this one!!!! Tell you what, great business idea, build up loads of "Trail" then write to all your clients saying you no longer want to deal with them and refuse to pass said "trail" to new IFA. That way you get all the income, with none of the work... Come on FSA, think about it, ongoing income, whether fees, trail or bloody pizza-express vouchers should rest with the servicing IFA - which is the CLIENT'S choice!!!
Posted by: You must be joking
FSA are wrong, again!
The trail commission in the illustration is described as paying for ongoing advice and service. Therefore the trail should be paid to the new adviser so long as they can evidence the service levels.
Posted by: Mark Mason
You've all missed the point....
....this has simply been done to help get rid of IFA's and to allow the banks and the currently being set up insurance company sales forces (that are I am told going to service all of the orphan clients when there has been no IFA contact in 2 years or the IFA is de-authorised), to go back to flogging all of their single premium business at 7% initial and treat regulars as recurring single premiums....simples!
Posted by: Mike Inkley
trail commission
I agree with Mike Inkley. Examine everything that has happened over the past couple of years and is predicted to happen post RDR and it is evident that the FSA's raison d'etre is to expunge IFAs. This action is being taken to help shore up the banks and to simplify their own lives. This proposal has nothing to do with TCF!
Posted by: Bill Wells
What about those who took 7% initial whiel others took only 3% plus 0.5%
Again this plays in to the hands of the banks who practically ALL took between 7% and 10% initial commission and NO ongoing while IFAs who wanted to give an ongoing service took 3% plus 0.5%. I missed this one para in PS 10/06 page 30 4.18. This means if an IFA leaves the industry in 2012, they business is downvalued and to boot, the FSA expects the retiring IFA to keep their files for infinity to defence against stale claims which exceed the longstop. I think the simple answer is if trail is turned off all files on that clients should be IMMEDIATLEY destroyed as the FSA have effectively cut off payment for the storage costs and defence of the case against stale claims through FOS. The banks had their 7-10% of the contract all up front, eitehr the FSA insists onthem all paying back the difference or this is totally immoral. But what is new with this lot who simply cannot see the unintedned consequencies of their actions. Adviser charging for new business AFTER 2012 I am quite happy with, we are already working on adviser charging for all new business written now, but keep your sticky hands off the trail I chose to take in lieu of hefty sums up front. This really sickens me..... FSA you need to have a rethink on this one or there are likely to be legal challenges all over the place. Oh yes you don't care because you don't have any personal liability for ANYTHING do you.....
Posted by: Phil Castle
Eyeballs then sockets!
No inital commission and now no trail. How will we pay their fees without any form of remuneration? We must fight this now it's a clear attempt to rid the uk of IFA's. Can you imagine Heinz being told they can't pay Tesco, Asda etc. to distribute their products there'd be hell to pay. A note to the sanctimonious RDR backers this will affect you as well.The commission hungry IFA is a minority but we're all going to hell in a handcart as a majority if the commission option is banned.
Posted by: Peter Taylor
Illogical!
Reading the relevant section (thanks Phil!) it states that if a previous adviser CANT "block" the transfer of trail (a whole issue in itself that one!), then the trail should go to the client, if a transfer of adviser occurs "FOR WHATEVER REASON". So, IF a client wants the transfer to occur because they WANT the new adviser to get the trail, as part of the new RDR world of agreeing advice charges etc, then the FSA dont think it should be allowed?! baffling....
Posted by: Paul Harding
Ship of fools strikes again...
Beyond belief..... Firstly the firm that sold the product deserves the trail as they selected that option instead of full initial. If another adviser is doing a change of servicing for that client post RDR, then due to the FSA's own ruling in TCF, this income has to be for a service, so what are the plums on about?? This lot are stupid beyond belief, one dept does not understand their own rules from elsewhere and too many of them are making up their own stuff in isolation. TCF is very good, but if applied properly would force banks to clean up their act. RDR is a complete mess, getting worse by the minute. This rule would promote churning and give a valid reason to do so. History is a great thing if anyone could be bothered to learn by it. Why do you suppose trail commission was introduced in to an indemnity commission World?? You get the feeling that this lot are learning as they go, everything in the World must be just one great big wonder/revelation to them. Why didnt they just employ people who know the industry??
Posted by: Ron Jones
It Must be A Conspriacy
When I first read this in the policy statement I have to admit my first, somewhat non PC thought, was well, that'll be a useful reason to switch new clients to our platform etc. However as much as I normally laugh at conspiracy theorists and their theories, because most conspirators couldn't be/aren't that clever, I have to admit everything the FSA does seems designed to zap the IFA out of existence. Maybe Kennedy was killed by????
Posted by: Roger Lane
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This is a clear case of drunks attacking the brewery. Short sighted ill concieved insanity.
Posted by: Terence P O'Halloran