‘Trail’ commission sparks debate

The debate over whether financial advisers should take commission for their advice was resumed this week as it emerged that Towry Law, a fee-only firm, also receives up to £6m a year in “trail” commission.

Taking commission for giving financial advice is to be banned from 2013. But even advisers that charge clients upfront fees may still be receiving commission in other ways.

Initial commission, which can be as high as 5 per cent on unit trusts, is largely condemned by financial advisers. But trail commission, which is paid annually to advisers by product providers for as long as an investment is held, may be more widespread than many investors realise.

Trail commission is taken out of the annual management charge on a fund. It is typically paid at an annual rate of 0.5 per cent of the sum invested for equity funds and at 0.3 per cent for corporate bond funds. Its purpose is to remunerate the adviser for ongoing advice relating to the product that the investor holds.

Critics argue that this commission acts as an incentive for the adviser to keep the client in the product, even if it is not in their best interests. They also argue that, often, little “ongoing” advice is offered.

But advisers who accept trail commission argue that the amounts received for selling different products vary so little that they cannot influence the investment choices they make.

“With unit trusts, the trail is similar,” explains Adrian Lowcock, senior investment adviser at Bestinvest. “We have no motivation to churn a portfolio.”

Bestinvest does not rebate the trail commission it receives, channelling it instead to its research team, to provide investors with notes on mutual funds.

According to Lowcock, one argument for trail commission is that it encourages ongoing advice – and therefore a better service. “Initial commission encourages people to sell a product and then not worry about servicing the client afterwards,” he says. “With trail commission, you are servicing the client – otherwise they’ll move somewhere else.”

He argues that the high sales of corporate bond funds this year – which pay lower commission than equity funds – show that advisers do not base their recommendations on commission.

Towry Law, the fee-based adviser, angered commission-based advisers this month after it admitted that it received up to £6m a year in deferred commission made to other adviser businesses that it has acquired. The company had previously been a critic of commission. Andrew Fisher, chief executive, wrote in the Financial Times earlier this year that: “Commission is at the heart of all that is wrong in the financial advice industry”.

However, he stressed that the commission received by his company was deferred initial commission, not ongoing commission for advice. “I am being paid by an insurance company for a product that was sold before I bought the company,” he says. “I don’t have any moral dilemma over that.”

Some advisers do rebate commission. Yellowtail, Saunderson House and Chartwell all offer to rebate trail commission to clients.

Discount brokers, which do not offer advice, will also rebate commission. Clubfinance, the broker, rebates three quarters of the trail commission it receives. “An investment has to perform significantly better when purchased through an adviser compared with us, in order to compensate for commission or fees charged by that adviser,” argues David Scrivens, director of Clubfinance.

Under the Financial Services Authority’s Retail Distribution Review, new trail commission payments will be banned from 2013, but existing trail payments will be allowed to continue. “That seems like an incentive to ‘sell now while stocks last’ for the less scrupulous adviser,” warns Dennis Hall at Yellowtail.