Nic Cicutti: In defence of trail commission


Will advisers and their trade bodies need to go to the barricades to defend trail commission? The possibility of this happening has been raised, according to Money Marketing, by the revised Markets in Financial Instruments Directive.

A story by MM head of investment news Laura Suter raised the issue last week in an article on new financial regulations from the European Commission, due to come into force in January 2017. The relevant section of Mifid II apparently states that restrictions on “fees, commissions or any monetary and non-monetary benefits” from third parties such as product providers will be considered “appropriate” under the new rules.

No technical note has been issued to accompany Mifid II, and this is not expected for another couple of months. Nor is the FCA so far planning to issue new guidance on trail beyond its current rules. However, experts Laura has spoken to are in little doubt that these rules could spell the end of this system of remuneration.

According to law firm Clarke Willmott partner Philippa Hann: “On the face of it, it will bring an end to trail commission to those offering advice on an independent basis”.

Investment Association retail markets specialist Mike Gould told MM: “I have discussed it with a couple of legal firms and that’s their understanding as well, it’s pretty much certain – subject to any change by the Commission.”

This is all speculation, of course. It could be that any technical guidance is less severe, perhaps through the use of a grandfathering clause. Or perhaps the FCA will argue there is a public interest in retaining trail in its current form, especially as evidence – also in Laura’s article – points to the fact that its use as a distinct form of remuneration is gradually decreasing for many firms.

Either way, what Laura has done has been to shine – once again – a light on a form of adviser remuneration which, like full upfront commission itself, deserves to die out in its present form as quickly as possible.

Let me be totally clear about this: I do not have a problem with the concept of clients paying a proportion of their investments under management to the adviser who is looking after them.

Properly used, trail can be an excellent way for a client to meet the cost of having someone manage their finances, servicing and reviewing their portfolios on a regular basis.

It is not perfect, of course. For many advisers, the small size of that portfolio means the ongoing trail is itself miniscule and does not compensate for the servicing work involved.

In other cases, although less and less the case nowadays, it was originally used as a form of deferred remuneration: instead of a fee or initial commission, the adviser opted to take trail payments during a product’s lifetime instead.

But in the right context, trail can be a fantastic way for an adviser to engage with clients and establish a lasting relationship with them, by stating clearly and in advance what he or she will provide in return for that regular payment.

For conscientious advisers, it also offers the potential to grow a business: talking to your client once or twice a year about how their financial plans are progressing allows you to offer further tailored advice, which may include adding to the existing investment portfolio.

One of my former advisers was incredibly good at this. Every year we would have a detailed review meeting in which I would be brought up to date with my portfolio’s performance and the extent to which I was on target to meet my plans, or otherwise.

If I was able to, I would also top up my existing investments, sometimes significantly and at other times less so. The “fee” for this service came largely out of the trail earned from my investments. Over time, these grew into the low six figures, justifying our mutual trust in both the advice and service I was receiving.

The problem for me came when this adviser’s firm was taken over by another which boldly stated it specialised in a fee-paying structure, while simultaneously raking in a huge chunk of its income from the trail earned off portfolios like mine.

What was new in this process was that trail in this instance was seen as deferred income – and it was at this point I discovered the service I received from my previous adviser, who had now left the new firm, had been entirely discretionary.

There was no legal obligation on the firm taking over the old business to continue with this service, which was totally unwritten in any contract I had with my previous adviser. If I wanted my account to be serviced there would be an hourly fee for this. In effect, I was getting the worst of both worlds.

Since then, I have taken steps to alter my relationship with advisers. I pay for each piece of advice I receive – but my ongoing trail payments are far, far smaller.

Despite this, I remain a tentative supporter of trail commission, as long as it is used properly and in the way I have described – and if providers hand back any unearned trail back to the client.

If it is, I will be happy to stand shoulder-to-shoulder with advisers, defending trail against Mifid II. See you on the barricades, comrades.

Nic Cicutti can be contacted at Follow him on twitter @NicCicutti