Up to a quarter of investment advisers’ income – equating to nearly a billion pounds annually - is under threat from regulatory plans to stop all legacy trail commission.
Financial advisers have been banned from receiving payments from fund managers and life companies for recommending their investment products since 31 December 2012 under Retail Distribution Review rules.
Legacy – pre-Retail Distribution Review – commission payments via investment platforms were switched off last April.
But a significant volume of off-platform investment business continues to be bound by commission arrangements.
Financial Conduct Authority data published in May revealed investment advisers still rely on trail commission payments for a big chunk of their income.
Revenue for retail investment activities has been growing year on year, reaching £3.25bn in 2016.
While the vast majority - 71 per cent – is paid for by clients via explicit fees or charges, around 26 per cent is still paid for by commission.
That amounts to £845m in income for advisers for last year alone.
These payments are now at risk, as the FCA is reviewing whether it should introduce a new sunset clause for all off-platform trail commission.
This proposal came as part of the watchdog's asset management market study, published on 28 June, in which the regulator revealed “a number” of respondents had called for a total sunset clause on all outstanding commission - a move fund managers said would enable them to "put all customers in the cheapest share class".
Where investors remain in pre-Retail Distribution Review share classes paying commission to advisers, it is either because they no longer receive ongoing advice or because those legacy investments are still considered to be suitable.
The focus on legacy commission marks a shock U-turn from the FCA, which stated in the interim report of their asset management market study last November that it had "no plans" to revisit this topic.
But the regulator has now opened the door to further action and called for responses from industry participants.
If it goes ahead with the switch off, the impact would be huge.
In the FCA’s November 2016 interim report, it spoke to 30 commission paying firms, such as fund managers and life companies.
Of those, 21 stated they were paying around £1.4bn in commission in 2015.
This is pre-plaform sunset clause, so some payments may have ceased since.
However Morningstar data published in the November 2016 stated 31 per cent of all UK domiciled funds are in classes that can pay trail.
In the 28 June report the FCA acknowledged the big impact turning off trail could have on advisers.
"Stopping the payment of trail commission could have a significant impact on the product providers, and particularly on self-employed advisers who rely on that trail commission for future income,” the report stated.
It added it would “welcome information from advisory firms and asset managers to better understand this issue".
Petronella West, co-founder and director of private clients at London-based Investment Quorum, which charges explicit fees for its advice, welcomed a switching off of all trail commission.
"Customers will be better off, and for advisers it shouldn't come as a shock, you've had six years to restructure your business, the writing has been on the wall since RDR.
"It will shake out the last of advisers that are relying on the [commission] money chain."
However Sam Caunt, director at Northampton-based advice firm Moerae Life Financial Planning, flagged an unintended consequence of switching off all trail that could hit clients as well as advisers.
He gave the example of a client with a life bond where the provider pays the advice firm renewal commission of 0.5 per cent, so £40 per month or £500 per year.
"We charge clients hourly for both initial and ongoing advice. Ongoing advice is a full review and may cost £1,200 per year on a time costed basis (or whatever frequency agreed with client). The review covers all her financial planning, investments, pension etc.
"However, the commission of £500 per year (and other commissions, fees, ongoing charges) is deducted from the bill and so her final bill will be £1,200 less £500 received from provider, so £700 maximum.
"If trail is switched off the client has to pay us £500 extra over and above what see currently pays us. That cannot be right – unless the commission is 100 per cent rebated back to the client. So the client could lose out."
Mr Caunt said, from his firm's perspective, what he loses is recovered from the client, and the amount of trail he receives is low anyway as his is a young practice.
"For other firms I could guess that ultimately ongoing fees will go up – a trend I think has increased post RDR to recover the cost in giving initial advice and to replace potential lost commission."
laura.miller@ft.com
