With the April 2016 implementation of the sunset clause getting closer, life will be getting increasingly tough for some advisers. Providers are seizing the opportunity to switch off trail income on legacy products, meaning that urgent action is needed for those firms that depend heavily on this revenue stream.
One of the main threats for advisers is that a loss of income may not be fully offset by a reduction in costs.
Given that the implementation deadline is looming, best practice suggests that the single most important thing a firm can do in response to these challenges is to design a clear, three-part transition process.
1. Client segmentation
I suggest starting this process with a client segmentation exercise. This involves setting the criteria that will be used to decide whether a transition will be suitable.
Advisers may find it useful to consider the following best practice questions:
• What is the size of the client’s overall portfolio?
• Do we have an ongoing relationship with the client?
• What is the longer-term outlook for this client?
• Is it worth us investing in a longer-term relationship?
• Do we have an emotional relationship with this particular client?
• What servicing model do we currently offer?
• Do we know if we are under- or over-servicing this client?
• How much revenue do we make from this client?
• Does this revenue make this client profitable?
• Could we provide a more cost-effective servicing solution?
• Do we have the resource capability to offer a service solution for this client?
• Is the current – or potential – complexity of the client’s affairs such that consolidation onto a suitable platform is appropriate?
• Should we terminate this relationship, acknowledging the loss of revenue?
As an outcome, this process will be able to produce a red / amber / green grading as follows:
• Green – Suitable for adviser charging and platform services.
• Amber – With sensible adjustments to the relationship and/or portfolio, suitable for an ongoing and platform-based relationship.
• Red – On the surface, unsuitable, and the income may well be allowed to simply cease in April 2016.
2. Cost implications
The next step will be to review the cost implication of changes for each client that we want to transfer.
It is not the case that clients can only be transferred if the cost to them is zero. However, where there is a cost increase, it must be made clear to the client:
• what the cost increase is,
• what that increased cost is paying for, and
• what are the benefits of any increase in cost to them.
They may have the option not to change, but this again will have implications and these need to be set out to them.
Combining the results of these two steps will give a list of clients for whom:
a: the size and complexity of the portfolio and relationship make it worthwhile to transition, and
b: the costs are known, and there is enough benefit to the client to make any additional costs worthwhile so that the advice is suitable and the client has not been ‘shoehorned’ purely for the benefit of the adviser.
3. Communicating decisions
In any event, a programme of communication will be required. Even where the advice is not to move, it will be important to communicate this decision and ensure clients are aware of the reduction in trail commission and confirming either a reduction in service or termination of the relationship. This will help clarify the nature of the relationships both with the adviser and the client’s relationship with the product provider.
The situation will necessitate some very tough conversations with clients about ongoing relationships. And these conversations – moving on from long-standing and emotionally connected clients is a hard process, and one that some advisers are reluctant to engage with. In the main, a long, hard look at service standards and costs for some clients will be a big help here – getting them to break even as a group may in itself be worth keeping them on board for.
Barry Neilson is business development director at Nucleus
