Scottish Widows announced on 7 August that initial commission on all new and existing corporate pension products will be cut off as of November, followed by implementation of a 75 basis point cap in April 2015 and removal of all ongoing trail commission payments as of April 2016.
But other firms have differed in their courses of action concerning trail commission leading up to a 2016 deadline, varying from immediate elimination to holding on to trail until the bitter end.
Standard Life ended trail commission on all legacy products for adviser clients in 2013 even where a new transaction is non-advised, as it claimed that the costs incurred in the process of deciding whether a transaction is advised or not is prohibitive.
In May this year, Aviva stated it would discontinue payment of initial commission to advisers on company pension scheme business from the end of 2014, but would continue with trail commissions until 2016.
Skandia set out its position in 2013 to keep trail commission at least until 2016, saying it was funded by the rebates that Skandia receives from fund groups. The company told advisers that only Isa and collective investment account products on its platform would be affected by the FCA’s ban on rebates, while pension and bond products would not.
Advisers now have more control over their charging structure following changes introduced with the RDR, but a change can have a significant impact, be it positive or negative, on the business.
The RDR stipulates all firms must establish appropriate charging structures based on the type of clients they see and the needs of the company. Options range from hourly rates, a percentage of the client’s investment, tier structure, defined stages, a fixed fee, and an initial review fee.
Prior to the RDR, advisers typically charged a 3 per cent initial commission and 0.5 per cent ongoing trial. Many firms are now weighing the other options available to tailor a plan best suited to their business and their clients.
The RDR policy states that advisers must focus on the level of service they provide and the outcome for the consumer when setting charges. The charges should not vary inappropriately between providers or between substitutable or competing products.
Trail commission has been prohibited on sales of new investment products since January 2013 and is likely to be phased out entirely for legacy business with the ban on platform rebates April 2016.
In improving the transparency of their charging structures since the RDR, advisory firms are establishing their policy concerning trail commission before the upcoming ban.
Allan Maxwell, independent financial adviser at Corporate Benefits Consulting, said, “I can understand the need behind the forthcoming ban, but a blanket ban seems a bit unfair. The problem is that some advisers are doing what they said they would and are being penalised for those who aren’t. We need a system that recognises this difference.”
Currently, if an adviser is going to charge an ongoing fee, they must prove that they are providing an ongoing service, such as regularly reviewing the performance of the client’s investments, or for regular payment products.
Matthew Smith, managing director at Buckingham Gate Chartered Financial Planners, said, “Overall, I think the changes to trail commission are a good thing. The changes made in RDR will help to improve charging transparency.
“There is, however, the issue of unintended consequences. Trail commission is a source of income for many firms, especially old firms. Some advisers are also concerned about losing relationships with clients that they have built up over the years, as the ongoing service with the fee provides a means of keeping in touch.”
