MoneyMatters, by Adrian Murphy

Nov 23 2012 Ayrshire Post

We are just over a month away from the most important change to Financial Services Regulation since 1986.

One of the key tenets of this change is the ban on commission from the January 1 2013. Many in the industry have underestimated the full impact on clients and advisory firms.

Legacy commission being received on policies sold over a long number of years contributes to firms incomes with no service.

This is a practice that will be likely to change over the coming 12 months or so, as more media coverage is devoted to it and companies offering to reclaim the trail commission from your policies.

This would seem fair where no service or administration is being carried out by the firm. I worry though that some clients will find themselves without advice when they come to the point it is needed.

The risk to advisory firms is cash flow. Not only through the risk of losing legacy trail commission, but also the trail commission for clients that are being serviced. Product providers will automatically turn off trail commission when specific actions are taken on a policy or investment, such as withdrawals. If your adviser does not have a process in place for adviser charging, alongside a new fee and service agreement, then it will very quickly start to impact on their cash flow, which will in turn impact on your service. One of the greatest myths perpetuated by the commission culture is that advice was free. Advisers didn’t have to demonstrate the value of what they do because the cost could be wrapped up in a product and often wasn’t fully disclosed to the client.

I know from our own experience that managing this, and explaining it to clients is a challenge, but we have been implementing this over the last couple of years.

Any firm that is only looking at this now is going to very quickly find themselves with serious problems. If you are able to show the value in the fees you are charging this shouldn’t be as difficult, but if your adviser has been taking commission for years and not communicating their service, then this is going to be an infinitely more difficult conversation.

On the subject of the Retail Distribution Review, it is not as simple as passing a few exams and carrying on as normal. The benefit for you, the client, is that you will be able to see quite clearly what your adviser is charging you, and hopefully you will be clear on what you are getting in exchange. you can contact us at moneymatters @murphyfinancial.co.uk