Since 31st December 2012, when a financial adviser recommends a new investment product, they are no longer able to receive ‘trail commission’ from the product provider.
Trail commission is an annual commission payment paid out of investment charges.
It is supposed to cover the cost of providing an ongoing service to an investor; delivering an annual review report, meeting each year with the investor, rebalancing their portfolio, checking investment funds remain suitable and answering any ad-hoc queries.
Investment products sold before 31st December 2012 can continue to pay trail commission, but investors can get it stopped if they are not receiving adequate value for money.
On their website, the Financial Conduct Authority (FCA) describes three ways in which investors can deal with the sometimes thorny issue of trail commission:
1 – Sell your investment
2 – Ask for a better service from your adviser
3 – Claim the commission
Selling your investment
The first option is the best way to guarantee trail commission payments are stopped. You can sell your existing investment, which pays trail commission to an adviser, and move to a new investment which is ‘clean’ and does not pay commission.
This course of action could result in lower ongoing charges for your investment, although you will need to compare the old and new investment charges to be sure.
There are some potential drawbacks associated with selling your investment in order to stop trail commission.
In some cases, it might trigger a Capital Gains Tax (CGT) charge. You might also suffer exit penalties or other administrative charges when you sell investments.
Investors with life assurance Investment Bonds could be subject to a chargeable event if they cancel their policy to stop the trail commission payments.
And then in terms of moving to a new investment, remember that some old style investment platforms, which operate on an ‘execution-only’ or self-directed investor basis, continue to pay trail commission to the platform provider.
If you are not careful, you could simply replace one set of trail commission charges with another.
Getting a better service
The second option of asking for a better service from your existing adviser is sensible, but a lot will depend on the adviser.
If your existing adviser has been receiving trail commission from your investments for years and not providing an adequate ongoing service, chances are they are either unwilling or unable to do so in the future.
Assuming your existing adviser is willing and able to deliver a good level of ongoing service in return for the trail commission you are paying, you should get a service agreement in writing to confirm precisely what they will be delivering each year.
Claiming the commission
The final option of claiming the commission is potentially the trickiest to turn into reality.
In the past few weeks we have seen the high profile failure of Ivan Massow’s business which promised to return the majority of trail commission payments to investors.
Other services do exist, but could struggle to remain commercially viable in the future as product providers gradually switch off trail commission payments.
Investors could switch adviser and negotiate a better service or return of some of the commission payments, but often switching adviser is considered by product providers as a ‘disturbance event’ and trail commission payments are stopped, without a corresponding reduction in product charges.
This issue – trail commission payments being stopped without product charges being reduced – is something we believe is inherently unfair to investors.
We are seeing this happen frequently and providers have no regulatory requirement it seems to pass the cost savings back to investors by reducing product charges. Instead, they trouser the additional revenue and often the investor ends up paying twice – once for the cancelled trail commission and once for new fees for ongoing advice.
Hopefully the Financial Conduct Authority will quickly address this issue, to ensure that product providers treat their customers fairly when it comes to the issue of trail commission.
In the meantime, investors should review their portfolios to understand what trail commission is being paid. They should consider these trail commission payments in the context of the value they receive from their adviser and then take action accordingly.
Do get in touch if you have any questions about trail commission or if you would like to discuss your options in more detail.
