Are full trail commission discount brokers history?

In my opinion almost certainly yes. Thanks to rule changes if nothing else..

In the beginning

Back in the mid to late 1990’s when investment discount brokers first started to emerge, the norm was that they would rebate some or all initial commission but keep any ongoing ‘trail’ commission for themselves. At the time it looked a great deal for investors. With initial commissions typically between 3-5% execution-only discount brokers often saved investors (who didn’t want or need advice) hundreds or even thousands of pounds. Especially since fund managers seldom offered any discounts when buying direct. The fact discount brokers retained trail commissions of around 0.5% didn’t seem that big a deal at the time.

Of course, trail commission is a big deal. Especially since many of those early customers will have built up significantly larger portfolios over the last 10 -20 years, meaning much higher trail commission payments.

The advent of trail commission rebates

Discount broker Commshare set the cat amongst the pigeons in 2001 when it started to rebate some trail commission and Hargreaves Lansdown more or less made the market its own the following year with the launch of its Vantage service. And since then we’ve seen the likes of Bestinvest and TQ follow. But these brokers have now largely been trounced in terms of cost by investment platforms with direct to public offerings, such as Alliance Trust Savings, Sippdeal, Interactive Investor and Charles Stanley.

Full trail brokers remain

Despite significant change in the marketplace, a number of the original discount brokers remain stuck in their ways, continuing to pocket all trail commissions. In fairness some claim to provide investment research in return, but then so do most of the lower cost brokers and platforms. Either way, it’s important to weigh up the quality and benefit of any such research against how much it’s effectively costing.

Who are the full trail brokers?

I’ve managed to find 11 discount brokers that, at the time of writing, still retain fund trail commission in full. As well as list them I thought I’d run a simple comparison showing the effective annual cost and projected 10 year portfolio value assuming a £300,000 ISA portfolio with a 7% annual return before charges and average 1.54% annual ‘retail’ fund costs (from which 0.5% trail commission and 0.25% platform fees are paid).

Broker	Annual commission	Effective Annual Cost for broker & platform	Projected Portfolio Value After 10 years
Chelsea Financial Services	0.50%	£2,250	£510,503
Close Brothers (self-directed)	0.50%	£2,250	£510,503
Dennehy Weller	0.50%	£2,250	£510,503
Elson Associates	0.50%	£2,250	£510,503
Financial Discounts Direct	0.50%	£2,250	£510,503
Fundsnet	0.50%	£2,250	£510,503
Moneysupermarket	0.50%	£2,250	£510,503
Moneyworld	0.50%	£2,250	£510,503
Seymour Sinclair	0.50%	£2,250	£510,503
SFS Invest Direct	0.50%	£2,250	£510,503
Willis Owen	0.50%	£2,250	£510,503

What about lower cost alternatives?

Most of the discount brokers or platforms who rebate at least some trail commission or use clean units and charge an explicit fee should prove cheaper. I’ve listed three of the lower costs platforms that use clean fund versions below for comparison, assuming average 0.79% annual ‘clean’ fund costs (for a more complete list of ISA discount brokers click here).

Platform	Annual fee	Effective Annual Cost for broker & platform	Projected Portfolio Value After 10 years
Alliance Trust Savings	£48*	£48	£547,315
Sippdeal	£50**	£50	£547,286
Charles Stanley Direct	0.25%	£750	£535,231
* £12.50 dealing charge ** £50 annual custody fee gives access to clean fund versions. £3.95 online dealing charge.

It’s clear that investors can potentially save a significant sum by moving from a full trail discount broker across to a lower cost alternative. But even those who want independent advice could end up better off too; over at Candid Financial Advice we have been dealing with a number of clients in this scenario that still end up paying lower overall costs with advice.

Why full trail brokers face extinction

While it seems an obvious decision for full trail broker customers to use a lower cost alternative, many appear to have stayed put. By my estimates it’s likely these brokers are collectively pocketing something like £27 million or more a year from trail commissions. They must love customer inertia.

But all this could change very soon. Rule changes mean all execution-only discount brokers can no longer be paid via commissions on new investments (or increased contributions/switches) from next 6 April 2014. And the commission must cease for existing investments by 6 April 2016.

So the many customers who have stayed put over the years may get a shock on realising they must pay for a service they may have incorrectly assumed was ‘free’, having made the mistake of assuming trail commissions are not ultimately paid out of their pocket.

Whether these brokers will be able to justify and/or get away with a c0.5% fee remains to be seen, but I am very sceptical in this increasingly competitive environment. I predict a number will fall by the wayside or end up selling out to competitors over the next two to three years (if not sooner).

What should you do?

Meanwhile, if you’re a customer of a full trail (or even partial trail) broker then I’d strongly suggest reviewing how much it’s costing you (via the trail commissions paid out of fund charges) and decide whether you can get better value elsewhere. You might find www.comparefundplatforms.com useful as a starting point for comparison.

Read this article at http://www.candidmoney.com/articles/277/are-full-trail-commission-discount-brokers-history