BBC journalist Paul Lewis and IFA Neil Liversidge have been having an interesting conversation about trail commission over the last few days...
Below is the entire correspondence:
From: Neil Liversidge
To Paul Lewis, Money Box, BBC Radio 4
In today's Money Box you referred to trail commission as ‘one of the industry's best kept secrets'. My clients will certainly not recognise that description though because what they pay is spelled out to them in the client agreement documents we provide. They know precisely what they pay and what they get in return. Given that the bulk of our business comes by referral from existing happy clients they seem to be very happy with the deal.
In addition to those benefits we contractually provide - ongoing reviews, personal meetings at their own homes, free fund and product switches etc - we also provide a vast amount of complementary advice and service for which we make no charge whatsoever at the point of use. When clients call or email to take up our time for a bit of advice here and there about this and that, we don't put them on a meter and send them a bill. Likewise we don't bill them for handling the thousand-and-one jobs incidental to managing their ongoing finances - all sorts of things from notifying address changes to obtaining probate values when a client dies. In my experience this is the case with the vast majority of IFAs.
We play fair - more than fair - for the trail we get.
I think it really is a shame Paul that once again you cannot resist slipping in the odd word or phrase designed to slander the personal finance industry and engender mistrust. The sad fact is that a lot of people who want something for nothing and that proportion of the population is growing thanks to the ongoing campaign of disinformation run by you and others like you. You purport to be a consumer champion but in reality all you are propagating is financial short-sightedness in the buying public, and a false belief that they can expect advice and ongoing service for free. I'll cite a real and recent example that illustrates the dangers which can result from that delusion: Every week I do a free financial advice spot on Radio Leeds. Judging by the feedback it's very popular and a great many listeners contact me direct. I probably spend a couple of hours a week answering generic queries by phone and email as a result of each show. Most don't turn into clients but a few do. About three weeks back I gave an hour in my office here to one such listener talking him through his pension options. Last week he wanted another meeting and some complex advice on a number of pension and investment related matters. It would obviously involve a significant amount of work and a substantial amount of liability to us should we get it wrong, so obviously we ensure we don't get it wrong by thoroughly fact-finding every client, conducting appropriate research and then spelling out the advice in a report. I explained what was involved priced up the work on a fixed fee basis at £550. Not a lot considering we would be advising on investments worth over £100k and he would in any case be looking at receiving a tax-free cash sum that could be as much as £70,000. At this point however he suddenly decided my advice wasn't worth having and actually stated, straight out, that he wasn't paying for advice and he would just commute as much pension as possible and take the maximum tax-free cash. Off he went. Well, it was his choice, but he is relatively young, has a large final salary pension pot, and by taking a higher pension instead of extra tax-free cash he would get an effective gross rate of return of 11.11% index linked by RPI, so that probably wasn't the best option. Without spending time doing a full fact-find however I would not ‘know my client' as the FSA requires and would not be able to advise him. Unlike you though Paul, I am not on a taxpayer-funded salary and I have to be paid somehow for the work I do. Funnily enough my staff expects to be paid too, likewise the utility companies, our landlord and our other suppliers, not to mention our friends the FSA. I also chip into something called the Financial Services Compensation Scheme and the Money Advice Service; all for the public benefit, all out of my pocket and all of which you and your ilk give us no credit for.
Whilst on the subject of things we get no credit for, on the Saturday after Northern Rock was nationalised a few years back I opened my office as a general financial surgery for the reassurance of the general public. There was no Northern Rock branch in Castleford but there was no shortage either of distraught pensioners frightened of losing their life savings. Much of this was down to Any Questions the previous evening. Despite the fact that NR had been nationalised one of Jonathan Dimbleby's village idiot panellists had said NR depositors should be worried and that she would certainly empty her account. I went on Any Answers that day to set the record straight, to explain that the fact it had been nationalised meant that there was no safer place for deposits. I'm sure Jonathan Dimbleby can find the tape if you want to check. Funnily enough though, I don't remember Money Box doing anything on its account that Saturday to set the record straight but hey, no news is good news and good news is no news, right?
Some years ago in my DBS days I took part in a Money Box debate with an ex-IFA who had retired in the 1980s. His angle was that IFAs were all overpaid these days. I asked him how much he had paid his compliance staff. After some bluster he admitted that he had never in fact had any compliance staff. I managed to draw out similar admissions that he had paid no professional body fees, no FSA fees, no FOS fees, no FSCS contribution and the rest. He probably had no qualifications either, apart from an infinite ability to voice uninformed opinions.
The fact is Paul that the giving of advice is a vastly more expensive business than it was 25 years ago and the increase in cost has not gone into advisers' pockets but into the pay packets of regulators and the associated compliance industry they have spawned.
I enjoyed that little radio debate and the opportunity it gave me to enlighten the deluded and inform the uninformed. I'm up for it again Paul, anytime, anyplace, anywhere, and with anyone you like - especially Ivan Massow.
Have you got the balls for it Paul? Has he?
All my contact numbers are on the bottom of this email and I eagerly await hearing from you as to when it can be scheduled. If you won't facilitate a fair debate Paul, then the decent thing to do would be to apologise on air and set the record straight yourself.
With kind regards,
Neil F Liversidge, Dip PFS
West Riding Personal Financial Solutions Ltd,
From: Paul Lewis
Thank you for your long and detailed comments on the item on Money Box about trail commission.
You objected to the phrase ‘one of the industry's best kept secrets' to describe trail commission. Let me refer you to the 15th report of the Treasury Select Committee published by Parliament on 6 July 2011. This link takes you to section 3 on commission. If you scroll down to paragraph 46 in particular you will see that the committee heard that under half of recent personal pension purchasers knew if their adviser took trail commission "only 46% are aware of whether their adviser received trail commission". GfK research for the Financial Services Consumer Panel found that "while most consumers were aware that financial advisers were paid by way of commission from providers, the majority were unaware of the existence of trail commission at all." Under the rules of course 100% should be aware of it and what it is for.
My own discussions with colleagues and others indicate that very few have heard of it. Indeed, when I have been talking to them in the last few weeks about Massow's venture the first reaction from almost all is ‘what is trail commission?' followed by a certain incredulity when I explain.
Of course in the small print of the documentation the amounts are there and sometimes labelled trail commission. But they are easily overlooked and the figures above speak for themselves.
You make the point that you are quite open and upfront about trail commission and do a lot of work for it. I have no reason to doubt that is true. I made the point in the interview that many and indeed a growing number of IFAs were very good and did work for their trail commission and that is why I specifically asked Ivan Massow to justify taking the commission away from them. Brian Dennehy also made that point. (Incidentally you can listen again to the item on our website or read a transcript of it which will be up in a few days' time via http://news.bbc.co.uk/1/hi/programmes/moneybox.)
But there are many IFAs receiving trail commisison for which little or no work is done. It is also worth remembering that the rules now are stricter than the rules in the past. Many people took out and the stopped paying into a personal pension in the past (half keep them less than four years - see http://www.fsa.gov.uk/pubs/other/Persistency_2010.pdf) but the trail keeps being paid until they reach their pension age. They are clearly getting no service at all. As the Select Committee concluded "Trail commission where advice is not offered is very difficult to justify." (para 49).
So I do not believe that to call trail commission a ‘secret' slanders the industry at all. It just describes the current position of the industry as a whole.
You also suggest I try to ‘engender mistrust' of the financial services industry. There are many financial advisers who deserve mistrust as the numerous mis-selling scandals attest. Anyone approaching an IFA or an adviser tied to a bank for advice should approach the meeting with a healthy scepticism.
Let me mention three cases that have recently come to my attention - all with IFAs. These are real stories with the names changed.
Mrs Abraham, a 76 year old widow with limited life expectancy, has around £80,000 in with profits investment bonds. She is advised to move them to a unit trust earning the adviser more than £3500 and trail commission of £400 a year. Two other advisers I have spoken to can see no reason for this move except to churn the investment. With her prospects a cash deposit from which she could draw would undoubtedly see her out at no risk and with no costs. That or leaving the money where it was seem the best two choices.
Mrs Barrett, a middle aged widow, able to buy a house with her own funds is advised instead to take out an offset mortgage of £50,000 with matching funds in a savings account. Again, I am advised there was no purpose in this recommendation except the generation of commission for the adviser for setting up the mortgage. She hates having the debt and has now decided to pay it off from the savings account. Her adviser did not inform her she could do that at any time.
Mrs Clitheroe, ditto, who told her adviser she had a good five figure sum from her late husband which she wanted to preserve intact but obtain some income from at no risk was advised to invest in a property based investment bond which is now worth about two thirds of its original value. The adviser earned several thousand pounds in commission and trail. Two independent advisers have told me she was misadvised. She is considering a complaint.
Of course I am not suggesting you or many other IFAs would have made such recommendations. But many would.
Let me also make it clear that I never advise anyone against taking independent financial advice - quite the opposite. I encourage them to do so and to avoid the tied agencies and the ‘advice' on their own products given by banks. But I always advise them to find a good IFA, try two or three out, check the ‘reasons why' letter carefully, and walk away if there is any reason to doubt the advice or the person who gives it. From what you tell me you would pass all those tests.
Nor do I encourage people to want something for nothing, as you imply I do. On the contrary I have long believed that commission is the cancer at the heart of the financial services industry and am extremely pleased it will go for new business form 1 January 2013. I advocate paying for advice upfront. And, if you can't afford it, ask yourself first ‘do I need the advice at all?' and if the answer is ‘yes' then borrow the money short-term. That is not something for nothing. It is something for something and is what I have been recommending for ten years. The Retail Distribution review is a golden opportunity for your business to remove commission and its embedded conflict of interest for ever and to charge fair fees for good advice.
Let me take up two minor points in your email.
I do not purport to be a ‘consumer champion'. I am a consumer journalist and see things from a consumer rather than an industry point of view. But that is a very different thing. Perhaps you are confusing me with my namesake Martin Lewis who does use that sobriquet.
I take no responsibility for the content of Any Questions. If you check the transcripts of Money Box at the time Northern Rock was nationalised - which was in fact some months after the run on the bank - you will find we took a very different line. See the programme on 23 February 2008 where we discussed putting money into Northern Rock for precisely the reasons you give - see http://news.bbc.co.uk/1/hi/programmes/moneybox/7258552.stm. And when the queues were round the block some months earlier our programme of 15 September 2007 was very different from your recollection. At one point it was clearly said the savers queuing round the block were not behaving rationally. Again the transcript is available via this page http://news.bbc.co.uk/1/hi/programmes/moneybox/6993488.stm. I do suggest you check the facts before making such allegations. Not that I mind but it does rather weaken your overall case.
As for your offer of a debate, I can only put it to the Money Box producers and editor. One role of Money Box is to bring together opposing views - as we did on Saturday. But it is unlikely we would stage a rerun of Saturday with Ivan Massow and you as another of his critics. A debate on whether financial advice and remuneration generally might be of interest especially in the run up to 1 January 2013. I cannot track down the debate you did for us before but when I am back in the office I may be able to. Whenabouts was it?
I will discuss this with the team and let them know your interest in participating. I am sure we will be discussing IFAs and how they charge their clients over the next 15 months.
Meanwhile, I see no reason to apologise and no record to set straight. If you wish to pursue a formal complaint through the BBC then you should address that to the editor Richard Vadon [email protected] and it can of course be taken above him subsequently if you wish.
From: Neil Liversidge
Thanks for your reply below. The free Online Dictionary offers the following definitions of ‘Secret' -
1. Kept hidden from knowledge or view; concealed.
2. Dependably discreet.
3. Operating in a hidden or confidential manner: a secret agent.
4. Not expressed; inward: their secret thoughts.
5. Not frequented; secluded: wandered about the secret byways of Paris.
6. Known or shared only by the initiated: secret rites.
7. Beyond ordinary understanding; mysterious.
8. Containing information, the unauthorized disclosure of which poses a grave threat to national security.
1. Something kept hidden from others or known only to oneself or to a few.
2. Something that remains beyond understanding or explanation; a mystery.
3. A method or formula on which success is based: The secret of this dish is in the sauce.
4. Secret A variable prayer said after the Offertory and before the Preface in the Mass.
As trail is clearly disclosed in writing I can only hold to my view that your description of trail as ‘one of the industry's best kept secrets' is unfair and misleading. The disclosure of trail means that it is not ‘Kept hidden from knowledge or view; concealed' or even ‘Dependably discreet'. It does not ‘Operate in a hidden or confidential manner', it is not ‘Known or shared only by the initiated' but on the other hand it is ‘Expressed'; indeed very clearly so. Neither does the manner in which it is expressed place it ‘Beyond ordinary understanding' or make it ‘mysterious'. I guess we can forget the one about national security.
To pick up your point that according to research "only 46% are aware of whether their adviser received trail commission" the only conclusions to be drawn from that are that the other 54% weren't listening when remuneration was explained to them and/or did not read the key features document provided to them and/or conveniently forgot about the information that was provided and/or lied to the researcher in the hope that they might be amongst the next beneficiaries of the undeserved and fraudulent compensation claims bandwagon. In order for ‘100% [to] be aware of it and what it is for' - and admit that they do - we will probably need to develop some type of mind-control system. I fear that brainwashing might be just a bit outside my skill set but I fear not beyond yours.
You say that your ‘own discussions with colleagues and others indicate that very few have heard of it.' The question here is whether those concerned have they type of investments to which trail might apply. BBC pensions don't pay trail of course and my BBC employee clients pay me agreed fees for the work I do for them when they want pension advice- all clear, agreed and disclosed up front. Likewise the individual quoted on your programmer who ‘heard about it in the pub'. Who is to say he had the kind of investment on which trail would be paid? If not then it is unlikely he would have heard of it. I am completely unaware of what professional fees are paid by golfers, footballers or tennis players being as I am a non-participant in those activities as my waistline attests.
Once again Paul you seek to twist the truth when you state ‘Of course in the small print of the documentation the amounts are there and sometimes labelled trail commission.' If you like I can show you any number of client specific illustrations where the type face and point size is no different to that used in most of the rest of the text.
I note you state that ‘there are many IFAs receiving trail commission for which little or no work is done.' Indeed there are. One such is a firm headed by an individual who has been a vocal exponent of the RDR. His firm benefits well into seven figures I understand. I am not defending anyone who is getting money for nothing; on the contrary I would hope that the clients of such firms would seek out replacement advisers who do deliver value-for-money. Massow however will not deliver what clients want because all he is doing is paying away a percentage and keeping a slice for himself. When those clients that have signed up find themselves in need of further advice they will get a rude awakening. Massow won't provide it free at the point of use as we do in exchange for the trail. Maybe he'd like to spell out to clients what he'll charge and what he'll provide if they find themselves needing actual advice down the line rather than just a cash redirection service.
You state that ‘Many people took out and then stopped paying into a personal pension in the past but the trail keeps being paid until they reach their pension age.' I suspect however that both you and the FSA are confusing trail commission with renewal commission on old style pre-stakeholder personal pensions that was in any event only paid so long as regular premiums were maintained and was typically 2.5% or less of each premium. Such pensions rarely paid a percentage of the fund as trail; in fact I cannot personally recall any that did. Up-front initial and renewal was the norm and if the premiums stopped the renewal stopped also. The kinds of pension plan that pay trail are a relatively recent phenomenon - SIPPs for example and personal pensions via ‘platforms'. We manage SIPP funds where we are paid 0.5%pa and where in some cases nothing more is being paid in. For that remuneration we manage the fund, advise on fund switches, arrange any drawdown payments and sundry other matters on a fully inclusive basis. We also offer an hourly rate alternative. We have had clients ask to move from hourly rate to 0.5% but none have wanted to move the other way funnily enough. One client for whom we manage a SIPP worth about £250k has had dozens of hours of advice on matters such as her non-dom status and the type of QROPS to which she might transfer, in addition to ongoing fund monitoring and switching. I suppose it is possible that there are some large pension funds out there where advisers are getting trail and the adviser is doing nothing for it. If so I suggest you send them our way and they can join our happy band.
As to your comment ‘So I do not believe that to call trail commission a ‘secret' slanders the industry at all. It just describes the current position of the industry as a whole.' How so, Paul? This just reads as yet another vague slur. Perhaps in future anyone listening to Money Box should approach the programme with a healthy scepticism.
Re' the three cases you cite, I am glad to say that if the individuals to whom you refer have indeed been badly advised then they can turn to the FOS free of charge to have their complaints resolved should the firms concerned fail to satisfy the clients. I, not the taxpayer, along with every other IFA, fund the FOS and the Financial Services Compensation Scheme, so bad advice is not in my interests. Without seeing the files it is difficult to comment but our default position on investments v mortgages is that unless there is a very good reason to the contrary you should always reduce/minimise borrowings before you invest money, and that paying down a mortgage and avoiding interest is in effect a good investment in itself. I am on record on Radio Leeds saying that until I am blue in the face. That said; it is worth making the point that the mere fact of old age or widowhood does not rule out equity investment. Playing the age card has become the equivalent of playing the joker in ‘It's a Knockout' for those like me who are old enough to remember it. Last Friday I saw a lady who will be 90 next month. She has had a fascinating life including ATS service in the Second World War and is still as bright as a button. She is an avid investor and we have excellent discussions at our frequent meetings. These are held at her home and the trail helps pay for my time. It also pays for us to do all her fund switches, ‘Bed and ISA' arrangements and for us to supply tax information for her accountants. I have a number of elderly clients of a similar mind. It is true that some elderly people are entirely unsuited to any form of stockmarket investment. My own late parents would have been classic examples, my father having worked as a coal miner for 46 years and my mother in the garment industry, neither capable of having any understanding of the risks involved. But they were born in the 1920s and were educated in the 1930s. Times change and those in their 60s now were in their mental prime when Thatcher's privatisations brought capitalism to the masses. You would be hard pushed to find anyone in their 60s today who had not at some time or other owned shares via a privatisation, demutualisation or employee share ownership plan.
You say that ‘commission is the cancer at the heart of the financial services industry'. There are problems with commission it is true, particularly when it creates product bias. The most obvious example is that of investors sold life assurance bonds when collectives (Unit Trusts/OEICs) held via an ISA wrapper would have been far more tax efficient. I am not knocking bonds per se - they have their uses - but commission bias has caused problems. That said, even the FSA's research found relatively little in the way of such bias. Those problems that have occurred could easily have been solved by a return to the old maximum commission agreement and by limiting bond commission payments to the same as collectives - typically 3% up front with the 0.5% trail you hate so much. The funny thing is though Paul, the trail you hate actually ends up being the guarantor of good service. I've seen many clients who were sold an insurance bond by an adviser who grabbed an obscene amount of commission up front - 9% in one case by a bank adviser whose employer had negotiated a sweetheart deal - and who never saw the client again. Paying everything up front just encourages the ‘sell it and run' brigade. Our client proposition from day one has being that of relating remuneration to ongoing service. If we didn't look after our clients they could walk and take their trail elsewhere. They don't - because we do deliver - and I do not believe or pretend we are unique in that regard.
Another benefit of commission factoring which you ignore is that it leaves the risk and the liability with the adviser whereas in the system you advocate - paying for advice upfront and borrowing the money short-term to pay the fee - leaves it with the client. Personally I try to get my clients out of debt, not in it.
With kind regards,
Neil F Liversidge, Dip PFS
West Riding Personal Financial Solutions Ltd
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