The financial press are reporting today that Aegon is switching off trail commission on ‘inactive’ pension plans.
Where there has been no change to an Aegon pension plan for three years, Aegon is cancelling the trail commission paid to advisers.
Trail commission is typically 0.5% of the value of the pension or investment plan, paid by the investor from product charges.
It is designed to remunerate the adviser for providing an ongoing service, although unfortunately some advisers view trail commission as a form of deferred initial commission.
That Aegon is cancelling trail commission on inactive pension plans is both good and bad.
It’s good that trail commission is only paid to advisers in return for an ongoing service. Where an adviser is not providing a proactive ongoing service, they do not deserve to be paid for doing nothing.
In our opinion, trail commission is certainly not an ongoing reward for the original product sale; this is very old model thinking.
However, what happens to the product charges which pay for the cancelled trail commission gives us cause for concern.
One of the biggest oversights in the Retail Distribution Review was the cancellation of trail commission without provision for lowering product charges by an equivalent amount.
Where trail commission stops being paid from a retail investment product – because for an example a fund switch takes place – the product provider or fund manager should be obliged to reduce product charges by the equivalent amount.
As things stand, this simply isn’t happening. Trail commission is being switched off and product providers or fund managers are pocketing the additional revenue. The Financial Conduct Authority (FCA) needs to step in urgently to sort this out.
The status quo can lead to the unfortunate situation where a client is paying twice for ongoing advice and service; once in the form of product charges on cancelled trail commission and then again in the form of an explicit ongoing fee to their adviser who is actually providing a service.
One more apparent disadvantage of the approach reportedly being taken by Aegon is that defining an ‘inactive’ pension plan is very difficult to do.
Very often the outcome from a comprehensive annual review with a client is to take no action. This means no fund switching and no changes to withdrawals or contribution levels.
When this happens, Aegon would appear to define that plan as ‘inactive’, despite the client having received a proactive ongoing service from their adviser.
We believe that trail commission in all its forms has a very limited life expectancy, as this news about Aegon demonstrates.
What we do as a profession need to ensure is that where trail commission is cancelled, investors are treated fairly by product providers and not double-charged for receiving an ongoing service.
