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Canary Wharf Sunset

Back in the pre RDR days, we placed our client’s PEP, ISA, OEIC and unit trust business largely with Cofunds – although Skandia and Fundsnetwork occasionally featured too.

We shunned the 8% commission paying capital investment bonds – preferring the more tax efficient (aka lower earning) approach of using ISA allowances and also direct investments – where the client can use their capital annual gains tax allowance.

At most, we received 3% at set up but most often took less – with between 0.25% (many bond/fixed interest funds) and 0.5% per annum of the value of the account as repeat income paid to help us carry the responsibility and look after that client’s ongoing needs.

Through foregoing the ‘megabucks’ on offer from UK Large Insurer Plc you could argue that the repeat income paid to us on ISAs and unit trusts was also a form of deferred income.

The Retail Distribution Review (RDR) and abolition of commission was flagged many months before it came into force on 31st December 2012. We took a look at those clients holding a wide variety of funds with a view to consolidating into single multi manager solutions pre-RDR.

Any fund switches were done at minimum cost (only what the platform charged us). At least this got the client (even with relatively moderate amount of investment) regular oversight of that investment , ongoing rebalancing and an asset allocation within agreed parameters. As we still got paid, we were able to be of some ongoing service even on the smaller client accounts.

Sunset on small client accounts

Then came the FCA ‘sunset clause’ effective 6th April 2016 ending ongoing commission payments in their current format. We have already moved most clients with assets in excess of £100,000 off platforms and onto clean share classes with a wrap provider. They have a servicing contract with us.

Of those remaining, we reckon conservatively around £23,000 per annum of this remaining trail commission (sorry, ‘legacy commission’) will be switched off come April 2016.

What to do about this loss of income? I asked my paraplanner to show me what was needed to move from the old charging basis to the new with Cofunds. Not a tick box – but a mass of paperwork including new risk profiles, fact finding, i.d., applications etc. One giant loss making administration heavy exercise.

It is simply not economically viable to save the £23,000. We’d spend more on administration and advice than £23,000. We’d also regenerate interest from smaller clients. That is rarely wise if you’re in business to make a decent profit each and every year.

I spoke to one or two IFAs at the PFS Conference in Birmingham last week and, after discussion, we were all of the same opinion. “Let them go”. Let the clients go and lose that income – it’s simply too time consuming and too much hassle to save the client or the income. “Get a new and wealthier client”.

What a result for the consumer. No advice. No IFA. Also great for the IFA who sees their income being cut for doing the right thing – versus flogging that 8% paying with profit bond all those years ago.

Shame too on the product providers and regulators for not making the platform change over to clean share classes and adviser fee a simple one tick box.

Advice gap now a chasm

The ‘advice gap’ between the ‘haves’ and ‘have not as much’ is now a chasm. No adviser with a calculator wants these clients. Feed them to the lions!

We all agree that clean share classes and the move to fees is more transparent – but clients with relatively modest savings are the real losers from this process.

There have also been a few naughty fund managers sneaking their costs up the way (that’s another subject for another day mind you).

Anyone want to buy some old legacy stuff from us? Deafening silence.

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