Yellowtail Blog

2 days ago I had a meeting with a possible new client and I’m still seething – WHY?

Looking through the large pile of papers that she brought to the meeting I could see that the existing financial adviser had made some investment recommendations way back in 2001. The advice at the time seemed reasonably comprehensive, if somewhat predictable. In short a portfolio of unit trusts was established alongside a with profits bond held in a trust. In total a sum of around £250,000 was invested. The client was adamant that this was work done on a fee basis, however, the fee mirrors the levels of commission normally available from these products. Significantly, included in the structure was a trail commission of 0.5% payable each year to the IFA. On a nominal £250,000 portfolio this equates to £1,250 paid every year since 2001.

So looking through the papers accumulated since 2001, comprising mainly annual valuations and newsletters, I was keen to understand what level of service had been provided for this annual payment of £1,250. I can see no evidence of any advice or fund switches to cater for a changing economic climate, nor any attempt to re-evaluate risk tolerance. Despite the client calling to the adviser on several occasions over the years suggesting a further meeting, there has been no contact apart from a computer generated valuations and an accompanying newsletter about world markets.

So what exactly does this £1,250 per annum actually do for the client? Well, it has reduced the value of the fund by around £10,000 because of higher annual management charges to pay the trail commission. Apart from that I can see very little; annual valuations, but at £1,250 each this is a bit steep isn’t it?

The sad thing is that this practice is repeated over and over as advisers build a business built of recurring trail commissions, but instead of delivering a service they simply retain the money and then find new clients to build an even bigger pile of money from which to derive a passive income. Many advisers I talk to see the trail commission as a reward for selling the unit trust in the first place, and not as a reward for service.

I have said it before and I will keep on saying it, commission should be banned. The Financial Sservices Authority agrees with that statement but have so far shied away from a complete ban. I know that there are many advisers who do deliver a service for the money they receive, and in my opinion they could easily demosntrate their value and move to a pure fee basis, that way we could show up the others for what they really are: parasites.

So I’m in a bit of a quandry here, what should I do? In the end I put the ball back in the client’s court. It’s a lot of informatio to absorb and in my experience many clients do not fully understand how we are paid, or what the differences are between various ways of charging fees. Expressing remuneration as a percentage of assets under management also doesn’t help, 0.5% doesn’t sound like a lot, whereas £1,250 (in this case) does.  I suggested they go and talk to their existing IFA and determine exactly what commissions he had received since 2001, and what level of service he proposed to deliver for the money being received.

It is likely however that the trust between client and adviser has been eroded to the point the relationship no longer exists in the client’s mind. If the client decides to engage us instead, then I think we owe a duty of crae to the client to write to the IFA for justification of the commissions received so far, and to ask for a rebate. I doubt we will be successful, but we do need to chip away at advisers who think they can continue to get paid commission year in and year out without having to deliver a service.