Canary Wharf Sunset

Back in the pre RDR days, we placed our client’s PEP, ISA, OEIC and unit trust business largely with Cofunds – although Skandia and Fundsnetwork occasionally featured too.

We shunned the 8% commission paying capital investment bonds – preferring the more tax efficient (aka lower earning) approach of using ISA allowances and also direct investments – where the client can use their capital annual gains tax allowance.

At most, we received 3% at set up but most often took less – with between 0.25% (many bond/fixed interest funds) and 0.5% per annum of the value of the account as repeat income paid to help us carry the responsibility and look after that client’s ongoing needs.

Through foregoing the ‘megabucks’ on offer from UK Large Insurer Plc you could argue that the repeat income paid to us on ISAs and unit trusts was also a form of deferred income.

The Retail Distribution Review (RDR) and abolition of commission was flagged many months before it came into force on 31st December 2012. We took a look at those clients holding a wide variety of funds with a view to consolidating into single multi manager solutions pre-RDR.

Any fund switches were done at minimum cost (only what the platform charged us). At least this got the client (even with relatively moderate amount of investment) regular oversight of that investment , ongoing rebalancing and an asset allocation within agreed parameters. As we still got paid, we were able to be of some ongoing service even on the smaller client accounts.

Sunset on small client accounts

Then came the FCA ‘sunset clause’ effective 6th April 2016 ending ongoing commission payments in their current format. We have already moved most clients with assets in excess of £100,000 off platforms and onto clean share classes with a wrap provider. They have a servicing contract with us.

Of those remaining, we reckon conservatively around £23,000 per annum of this remaining trail commission (sorry, ‘legacy commission’) will be switched off come April 2016.

What to do about this loss of income? I asked my paraplanner to show me what was needed to move from the old charging basis to the new with Cofunds. Not a tick box – but a mass of paperwork including new risk profiles, fact finding, i.d., applications etc. One giant loss making administration heavy exercise.

It is simply not economically viable to save the £23,000. We’d spend more on administration and advice than £23,000. We’d also regenerate interest from smaller clients. That is rarely wise if you’re in business to make a decent profit each and every year.

I spoke to one or two IFAs at the PFS Conference in Birmingham last week and, after discussion, we were all of the same opinion. “Let them go”. Let the clients go and lose that income – it’s simply too time consuming and too much hassle to save the client or the income. “Get a new and wealthier client”.

What a result for the consumer. No advice. No IFA. Also great for the IFA who sees their income being cut for doing the right thing – versus flogging that 8% paying with profit bond all those years ago.

Shame too on the product providers and regulators for not making the platform change over to clean share classes and adviser fee a simple one tick box.

Advice gap now a chasm

The ‘advice gap’ between the ‘haves’ and ‘have not as much’ is now a chasm. No adviser with a calculator wants these clients. Feed them to the lions!

We all agree that clean share classes and the move to fees is more transparent – but clients with relatively modest savings are the real losers from this process.

There have also been a few naughty fund managers sneaking their costs up the way (that’s another subject for another day mind you).

Anyone want to buy some old legacy stuff from us? Deafening silence.


5 thoughts on “Canary Wharf Sunset

  • Hi Iain,

    It’s an interesting view, but I don’t recognise some of the beliefs described here including ‘a form of deferred income’ and ‘Feed them to the lions!’.

    You’ve correctly identified that you are in business to make a decent profit each and every year. Whilst never nice to remove £23,000 a year of income from a business, apply the 80/20 rule and I’m sure that revenue will be readily replaced with more profitable income.

    As for feeding old transactional customers to the lions; disengage with them professionally and kindly, and it doesn’t have to be quite like that. Done well, some of them might even come back to you as profitable clients, or happily refer a better quality of client to you in the future.

    You might be surprised at how understanding they are when you explain the reasons for deciding to end the relationship.

  • Trail commission is just that – commission. The latter-day invention of ‘servicing charge’ simply seeks to justify it, as if it is an embarrassment.

    The introduction of the sunset clause was announced in April 2013, a full 3 years before the sun was due to disappear over the horizon. It’s not as if there wasn’t plenty of warning, with plenty of time to plan, e.g. by diligently assessing various platforms’ progress re new share classes. Existing funds could be maintained – you just won’t get the trail post 4/16.

    I’d suggest advisers consider their principles, however deep, before adopting this ‘Pontius Pilate’ approach to customer service. I find the idea of dumping clients because they’re not worth the effort, an affront to customer service and TCF #1 in particular – having TCF at the heart of the business – let alone #5 and #6. Happy to take your cash while it’s easy, but not happy to go a few extra miles. What is the point of a customer being associated with a business that is likely to walk away when customer service becomes a chore, leaving them to pick up the pieces themselves? Unfortunately, the remaining clients probably won’t get to hear how their peers were treated.

    When advisers write to clients to inform them of this initiative, I trust they’ll have the honour to say “I could have sorted this out earlier but didn’t. I could sort it out now, but I can’t be bothered with all the work this will involve, and I’m not convinced you’ll pay me extra to do it either”

  • Hi Iain
    We went through a similar process last year, and reached the same conclusion as you about what to do with the clients.
    With the benefit of hindsight, we would have done things slightly differently.
    We found a company that was willing to service the clients who didnt fit our model, and pay us for the privilege. We decided which clients we wanted to keep, and the rest of them were acquired by the new company.
    A common reaction from clients was “why didnt you just increase my fees, we would have been happy to pay”. Unfortunately, it was too late by then, and the clients had been acquired (and there was no going back).
    I think that we underestimated the value which clients place on our service, and I think that is probably common amongst advisers.
    Many more clients now pay us by standing order too, rather than through adviser charges. It puts us in control of our income (admin isnt a strong point for most insurance and investment companies, so why give them the oppportunity to mess up our income!), and it’s much easier for us and the client to decide whether the service we are offering is value for money.
    If I was to have the chance to go back in time, I would ask those low value clients if they would prefer to pay us a fixed monthly fee by standing order for a specified list of services; those that didnt could be “let go”, whereas those who did could stay on as clients.
    I hope that helps

  • Hi Graham,

    Whilst I endorse your view of simply dumping clients it is important in these litigious days to establish clearly whether both parties believe a commercial link exists between them.

    Never one to throw anything away I have always insisted that we make ludicrous efforts to establish a dialogue with people whose names are linked with our business through policy documents etc.

    Sometimes though you do eventually have to accept that you do no longer have a place in their lives and do whatever is necessary to sever any link between you.

    In our business we resort to sending registered letters explaining that their lack of response gives us no option but to sack them and to place them into the providers hands.

    Bit messy but you need to try and erect some protection against ambulance chasers.

  • Interesting response from Graham B – ex of Skandia – Skandia never seemed to have an issue paying IFAs 8% commission for a one off sale. Where was the incentive to service that client ongoing? Zero!

    Skandia and the other product providers were part of the problem that led to the RDR seeking to address how advisers were remunerated a and how insurers bought in the business. Any IFAs for a free jolly to Cowes? 8% commission? Free lunches all round. Hopefully these days are (nearly) over.

    The statement ” I find the idea of dumping clients because they’re not worth the effort, an affront to customer service and TCF #1 in particular – having TCF at the heart of the business – let alone #5 and #6″ – is clearly from someone who has never run his own profitable financial advice business or would prefer to run a charity. Stuck in corporate cloud cuckoo land.

    There are nice and proper ways to elegantly dis-engage from a client for whom our services no longer fit, or where they are unable (or don’t wish) to pay fees or simply where, net of the fees, they are not going to be better off. That approach is really treating clients fairly.

    It’s not IFAs that have unilaterally altered the system or the rules – or allowed FCA, FOS and especially the FSCS costs to run out of control.

    Our job is not to advise (or keep advising) anyone who comes over our door threshold. The ‘breath on the glass and you are in’ days are over. Now, we are qualifying the client (‘customer’ in insurance land speak) as much as they are qualifying us (if not more so). We have to. To quote American investment sage Nick Murray ‘many are called – but few are chosen’.

    We are keeping time sheets in the office now for everything to really drill down the the true cost of running a highly qualified, well run, well staffed financial planning practice. This is no time for sentiment. Any fool can run a loss making business. Just ask the big insurance company based wrap providers!

    To suggest that there was nil servicing going on in return for trail commission assumes that all IFA firms were and are run on a ‘sell the product and forget the client’ basis. 1980 was a while ago right enough. An ill informed comment. Out of touch.

    Agree 3 years is plenty of time to plan – but a £20k ISA pot is a £20k ISA pot. In a fee based world, with high practice running costs (thanks the FSCS) , no IFA (not even one in his back bedroom) can operate at a profit on these sums. If it is easy to operate at a profit in these areas – why isn’t anyone?

    A few IFAs have tried the direct to consumer online approach for ‘smaller’ clients – but have yet to see any traction there. Build it – blow your trumpet – and they won’t come. Still they don’t cue. Why not?

    I have had an interesting approach from a firm who feel they can operate profitably in this space with clients that fall below the profit line – and with little potential to accumulate (and little or no need for more sophisticated or regular advice). We are following that up.

    In the meantime, I’ve heard that the Money Advice Service (which I partly fund) is awaiting the calls from the disenfranchised. Or you can play pot luck find an IFA bingo on .

    There is also a case for the product providers to offer some ongoing service too fir orphan clients (or the money will more than likely walk out the door).

    I explained the switching off of ‘trail commission’ to a CA recently. They described this as a form of theft- as it unilaterally altered the original payment agreement to the detriment of the IFA. An interesting view.

    What has happened, pre and post RDR, is that many ‘IFAs’, often for the first time, have taken a long hard look at their costs, what they do, why they do it and whom the do it (best) for. Some clients will fit the criteria and many more will not. Commercial reality.

    To suggest buying a financial product from an IFA – especially where the IFA no longer gets paid to service the contract – somehow guarantees a lifetime commitment to that client (or a breach of TCF) is plain absurd.


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