April 2016 represents a watershed moment for our profession, with the end of trail, or legacy commission planned. The consequences for many small firms might well be fatal, but there is still time to act.
It is eighteen months since the long and tortuous six year development process for the Retail Distribution Review came into effect, by the then Financial Services Authority (FSA). The FSA created the review to raise the level of confidence that consumers had in the financial advice market.
Since then firms have needed to make sure they have a structured client proposition in place with a sensible fee structure that is fair to both the adviser and to the client for all new client business going forward. But what of clients that haven't yet moved across to this new fee based structure?
These clients remain on legacy commissions, paid by pension companies and other investment management businesses to financial advisers (normally about 0.5 percent) and have been the lifeblood of many small IFAs providing an assured cash flow and financial stability. In April 2016 a larger percentage of all legacy commissions will be switched off.
In fact some of the main providers of financial products have already started to eliminate trail commission. Standard Life, for example, ended trail commission on many of its legacy products last year. Some providers are calling clients and asking if they're being looked after by their IFA and if the client says no, then the provider is switching off trail commission immediately. This will have a huge impact on firms who haven’t yet got most of their clients onto their new client proposition.
Many IFAs have used this trail commission to fund and cross subsidise the speculative advice work they get from other people. If your client proposition only stimulates a fee if a transaction is involved, and you no longer have trail commission to cross subsidise, how will that affect your business? How will it balance against your overheads? These are real issues that many IFA firms are having to face.
What if a firm is looking to sell? How do these changes impact on the value of a firm? Valuations have been based on a multiple of reoccurring income and it’s important that these owners consider how switching off of legacy commission will affect that?
What options are there if you have survived the recession and the first part of post RDR but depend on trail commission for much of your livelihood?
The first and most obvious answer to this is to create a new framework of charges for services. This isn’t without its challenges; the most significant being moving your clients from trail to fee charging without losing them or a significant loss in income.
It's crucial advisers, if they have not already done so, move to segment their clients and become much more commercial about how they deal with them. There needs to be a real commitment to client service, justifying and reflecting the fees being charged and a formalised pricing policy that covers advice and not just transactions.
The perceived increase in costs is not a welcome development for all clients but when positioned well is accepted by most clients. Failure to achieve migration successfully will result in fewer clients paying for advice and with the termination of legacy commissions in 2016 could mean that the growing costs of running and IFA firm with the loss of income spells the end for some firms.
If you are approaching retirement, the next two years will be the ideal time to leave the marketplace altogether. The lack of trail commission does not mean that the business you have spent a career creating could be worthless, move your clients onto your new client proposition and make sure you clearly segment your clients.
Having access to clients who have already been cultivated by you represents a massive potential saving in terms of marketing costs, so why go searching for customers when you can buy someone else’s for much less?
We are currently looking for IFA businesses that are facing an uncertain future or advisers who are considering retiring from the industry. For a free, informal chat please contact us here.