Trail in a Twist

There’s been quite an uproar in financial circles recently after the boss of financial adviser Towry Law admitted that his firm receives £6 million of annual trail commission from products previously sold to 300,000 clients they no longer look after.

For the uninitiated, trail commission is an annual payment from financial providers to commission-based advisers after a product has been sold, usually paid for as long as the client holds that product. For example, unit trusts typically pay advisers 0.5% of the fund value each year as a trail commission.

While this might sound like money for old rope, trail commission should enable advisers to continue looking after clients post sale without charging additional fees. It also means that clients can take their custom (and trail commission) elsewhere if they feel their adviser is not providing satisfactory service.

So, all in all, while I’m not a fan of commissions, trail commission is actually not a bad thing.

However, it becomes a problem when advisers pocket the trail commission and do diddly-squat to earn it, a 'hit and run' sales approach. Clued up clients would almost certainly take their business and trail commission elsewhere, but less savvy clients (of which Towry Law appears to have about 300,000) add to the pile of victims in an industry that all too often seems more focussed on lining its own pockets than those of its customers.

I’m pretty fed up of such practices, so I’ve come up with three proposals that could help prevent this type of situation arising in future.

1.Compel financial advisers to get a written (or online) authority from their clients every two years confirming they’re happy for the adviser to continue receiving trail commission. If not received, the ongoing commission would then be diverted into a ring-fenced Financial Services Compensation Scheme (FSCS) ‘pot’ until such a time that the client appoints another adviser to receive the commission. This would remove the trail without service problem and the ‘pot’ could then help reduce the extent that decent financial advisers have to subsidise the actions of irresponsible ones via their FSCS levies. [When advisers who mis-sold become insolvent, client compensation claims are passed to the FSCS to sort out. The FSCS is partly funded by annual levies on financial advisers.]
2.Where an adviser buys the assets of another troubled adviser firm and leaves the FSCS to pick up the pieces regarding clients with compensation claims, the adviser must get authority as above within a year of acquiring the assets.
3.Ban initial commission on product sales that involve moving from another product sold within the five previous years (with a few obvious exceptions such as a pension being used to buy an annuity).
These measures won’t solve every woe in the industry, but I do believe they could make a worthwhile increase to the likelihood of customers being treated fairly. Something which, to be fair, Towry Law states as a key objective.