Legacy commission ban: Concern over fund switches

scaremongering...

The FSA paper is quite clear in providing two definitions... one for legacy commission (NEW commission generated on a pre RDR contract) and trail commission (ongoing payments on pre RDR contracts). The paper then goes on to provide examples of what would have a bearing on LEGACY commission and NOT, I REPEAT NOT, trail commission. As a fund switch would not generate NEW (i.e. legacy commission) there is no issue... For god's sake, read the paper properly!

Posted by: You must be joking

well done, FSA!

I find it ludicrous, that with less than a year to go, the FSA is still stalling on what the financial services world in 2013 will look like. To not receive trail for fund switches, is asking anybody to a job for nothing. This should have been sorted at the same time as asking advisers to achieve QCF4, not as an afterthought, perceived to be decided after a few Stella's and written on a fag packet. If this is the stance, then advisers should opt for a fee paying service only, which flies in the face of offering a client a choice!

Posted by: victor sacks

A voice in the wilderness

For some time now i have felt like a voice in the wilderness. How encouraging therefore to be joined by the first Comment here today! I ays to Providers, Pundits. Journalists, IFAs and anyone else who can be bothered PLEASE READ THE FSA GUIDANCE. It is quite clear that Trail Commission should be turned off where there is an ADDITIONAL payment of commission generated for advice given on a legacy product. The key word is ADDITIONAL. If commission is already in payment and no additional commission is generated by advice on a legacy product then the commission can and should continue. Generally advising a client to switch a fund within say a Bond does not generate additional commission (unless there is a Switching Charge by the IFA.) Once again i echo the comment above READ THE GUIDANCE - but read it carefully and properly.

Posted by: Grosvenor

Legacy commission ban

To 'a voice in the wilderness' - I'm not sure that it is that clear cut. It may be clear when dealing and switching within a bond wrapper but most of my clients are on platforms (ISAs and other collectives with CoFunds, FundsNetwork,Skandia etc. Even within an ISA a switch represents an actual sale and repurchase - indeed, it could be that the 2 funds involved with a switch could have different trail amounts (say 0.5% and 0.25%). Outside of an ISA it can easily be argued that a switch is actually the sale of an existing investment and the purchase of a NEW investment. In any case, given all the uncertainty it shouldn't be too difficult, or asking too much, for the regulator to clarify the matter (albeit, we are talking about the FSA with a history of incompetence, obfuscation and unintended consequences).

Posted by: Bill Wells

To Grosvenor and you must be joking

You are right that the FSA paper is clear that switches are out of scope...however, in recent discussions with the FSA, they have made it clear that in their final rules they will be forcing trail commission to be turned off on switches. It is this statement from the FSA that everyone is getting excited about, not the actual legacy CP. Don't hide your head in the sand as this is very real and it isn't that people have read the paper incorrectly!

Posted by: To provide clarity

What a fuss you are all making.

Surely working on an advisory basis with clients, you are always getting your clients agreement to switch funds. What is the problem with taking this opportunity to also get their authority to start to draw your trail as an ongoing fee at the same time? Unless you already hold a discretionary mandate, I cannot see any reason why you would be organising a fund switch without a client authority. If you are all afraid of having a frank and open discussion about your fee structure with your clients, you are not the type of adviser that this brave new world demands.

Posted by: Tony Capener

Which way is up

Irrespective of the merits of the FSA doctrine on remuneration I do find some of the comments in this article bewildering, in particular those by Ian Lowes. First of all there is no significant evidence that switching funds makes a material difference to the performance of a portfolio, though it may be used to adjust the perceived risk level. I use the term "perceived risk level" because there is no FSA stated or approved method of quantifying risk. The risk measurements used are almost entirely based on perception. So, as recent events have demonstrated, even perceived safe investments have seen massive value changes. The majority of evidence points to the fact that inertia in portfolio management can often lead to better performance results. See "The Little Book of Behavioural Investing", around Page 51, as just one confirmation. There are many others. So the concept of "not switching" being a major problem is, in the words of Confucius "Bunkum". I have made changes in the past that have been good and bad, but in the main I actually haven't any idea what the benefit was because I did not keep a record of the old portfolio. So I tell myself, and the client, I did well and everyone is happy. But the truth is, we haven't a clue. So there is no justification in fact for stating that active management is necessary, other than for the Advisor's wallet. And given the comments of Aegon and Aviva it is quite possible that the providers make money on these turns. Having established the fact that changing investments is not automatically beneficial to the client, we now need to understand why advisers would be reluctant to provide advice. I would sympathise if advice was given free, but there is absolutely no need for this. Any work done should be paid for. How it is paid for should be agreed with the client - this is something I did for over 10 years. Some will prefer commissions, some will prefer fees, and some will have a combination of the two. I generally preferred fees because it meant that I would be paid for monitoring a portfolio without being "forced" to make changes to create a income stream. And if changes were made they were generally done at very low or without adviser cost because that had already been paid for. So if advisers are deterred from providing advice because of commission alterations there is something wrong with the Advisers understanding of where RDR is taking them. I'm not convinced that RDR is a sane process, but the direction is clear. Most of these misunderstandings appear to arise from advisers trying to take old strategies into a brand new game. And the response from the Providers indicate that they too are paddling in the wrong direction, relative to the FSA. [Great combination of mixed metaphors]. Indeed I would suggest that in 2013 it will be the Provider end of the advice chain that causes the greatest level of dysfunction. And the reason will be - because the computer won't allow us to do that. I know because it is the excuse I have heard for the last 20 years.

Posted by: Glen McKeown