‘Hundreds’ of IFAs using managed funds to ‘lock-in’ trail

Hundreds of firms are moving clients into multi-asset managed funds in an effort to ensure that trail commission is not removed on existing business following the implementation of the Retail Distribution Review, according to SimplyBiz.

Under the RDR rules advisers can keep trail commission for ‘undisturbed funds’, that is those that are not moved by the adviser. If the funds are moved, then new terms will be agreed and and advisers will no longer be entitled to trail commission.

In the lead up to the deadline for the new rules, several investment industry experts have claimed that advisers are seeking to recommend managed funds that allocate across asset classes and that actively move capital in response to market movements.

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In response to the Financial Services Authority’s latest consultation paper on legacy commission, SimplyBiz said the treatment of legacy trail is an “area of anxiety” for many and that it could affect advisers looking to sell their business during 2011, due to the fact that passive trail forms the “bulk of the value” in many smaller firms.

Neil Stevens, joint managing director of SimplyBiz, said that one solution to the problem could be advisers working with managed portfolio funds, which provide the “ideal solution” for the client and adviser if no ongoing advice is to be delivered.

Mr Stevens said: “We are aware of literally hundreds of firms that are moving to this model in preparation for RDR.”

Last week, FTAdviser reported that Adrian Lowcock, senior investment adviser for Bestinvest, had said this trend could account for the continuing popularity of managed fund sectors, which are heavily weighted towards multi-asset funds, and that this popularity could could to grow in the year ahead.

Mr Lowcock said that if advisers outsource the research and asset allocation in this way, clients’ funds will remain tied-up potentially for the next five to 10 years, meaning that new terms will not be agreed and the adviser will be able to keep trail commission for those funds.

Mr Stevens said: “The client can access a strategy that will be managed, by a professional firm, to their ongoing needs and the problems involved with ‘advised’ switching to maintain the client’s portfolio simply disappear.

“So long as the portfolio funds are available in all of the places the adviser has historically written their business this presents a one-time opportunity for advisers to evolve the legacy book to the benefit of their clients and their business value and revenues.”