Smallwood's Shout: Trail commission clarification welcome

Chris Smallwood, CEO of 2plan Wealth Management, explains why the FSA’s clarification on trail commission will help advisers transition for RDR.

Whilst many a cheer was heard in the pub when England scored their first World Cup goal, fortunately it appears there are also a few other reasons for us to celebrate.

The FSA has now confirmed advisers will be allowed to continue to receive existing trail commission post-2012, even when a firm is sold or joins a network.

As FSA director of conduct policy, Sheila Nicoll, explains: “In requiring firms to abandon commission from 2013, we are not challenging your right to continue to receive trail commission for advice given in the past.

“If, at the end of 2012, an adviser firm has a right to receive trail commission, we will not be seeking to interfere with that. And if, for example, an advisory business is sold, our new rules will not prevent entitlements to trail commission from being transferred to the new firm.”

This is welcome news if, as it appears, the change in sentiment will now allow a smooth transition for firms that wish to change their authorisation – either from directly authorised to networks or nationals – or indeed sell their business.

Preventing this would have caused significant stress for many firms now concerned with what options they may have going forward, particularly those looking for a possible exit after a lengthy industry career. Although trail commission as we know it will end in respect of new business post 2012, the regulator has at least allayed some fears with a more moderate approach.

The FSA says: “After 2012, it will not be possible to generate new trail commission entitlements and, over time, trail commission will peter out altogether in the investment market.”

Personally I think the FSA was genuinely looking to fix one problem but, in doing so, created another. I believe one of the reasons the rule was introduced was to stop advisers going round ‘hoovering-up’ clients and trail income but not providing any ongoing service to clients – with the only objective of receiving recurring income streams from the providers.

Now that we have confirmation the regulator expects trail commission to peter out, it is also much easier to understand the right way forward: where an adviser is receiving trail then they can continue to receive that historic trail post 2013, but then going forward, ongoing charges will only be levied where a client is paying for an ongoing service.

For our own advisers, this is a powerful argument as to why adoption of our new Personal Client Agreements (PCA) aligns the adviser and client perfectly. The client enters into an ongoing service agreement with the adviser which sets out (amongst other things) the service the client will receive; how much this will cost and also that the client can cancel the service and cease payment of the associated charges if they felt that they were not receiving the service they had signed up to.

Over time trail commission as we know it will indeed cease to exist and an adviser’s business would be made up from – for example – 200 PCAs in place and the adviser receiving ongoing service fees for whatever they have agreed with their clients. If they then look to sell their business, they have 200 PCAs to effectively sell i.e. the value of their business is the quality and amount of PCAs set up (quality of clients plus the number of them).

This in itself instils the need for advisers to build up long-lasting, professional, trusted business relationships with their clients and seek to provide financial advice and guidance over the years focusing on clients’ goals and objectives.