Uncertainty over the future of trail commission will change forever the way IFA businesses are bought and sold, reports Carmen Reichman.
Trail commission, the regular flow of income from the sale of products in the past, used to form an attractive part of the package for prospective buyers of an adviser client base.
But as times, and more importantly regulation, have changed, some advisers looking to expand their businesses are saying they will not buy a firm that has clients on trail commission, let alone price it on a ‘fixed multiple mechanism' based on trail.
It would seem some believe the writing is on the wall for trail commission.
Why doubts over trail commission are troubling IFA buyers
As it currently stands, future trail commission on the sale of investment products was wiped out by the Retail Distribution Review (RDR) but the rules left all business handled before 31 December 2012 alone.
But that's not the end of the story.
The Financial Conduct Authority (FCA) made a further inroad when it ruled trail commission on platforms would cease from April 2016. However, it stopped short of wiping out the concept completely. Instead, it outlined a number of rules under which the collection of trail is allowed to continue.
The regulator revisited the issue in its June board meeting, the minutes of which revealed that the watchdog was discussing "whether the lack of end-date for the payment of trail commission on pre-RDR business might lead firms to act in ways that risked poor consumer outcomes".
Furthermore, the regulator sent an RDR implementation questionnaire to 50 firms earlier this year, asking them for details on the services they were providing to justify receiving legacy trail payments.
Providers have also shown a keenness to move to clean share classes, with some, such as Standard Life, already announcing mass migrations prior to the 2016 platform deadline.
‘I don't want to pay for trail'
Appleton Gerrard financial planner Kusal Ariyawansa, who has been in negotiations to take over a client base worth £70m for a number of years, said the deal had been hindered due to the "significant number of clients on trail".
"I do not want to pay anything for existing trail business. I'm surprised it's only now coming to light in the market because for a long time providers have clearly stated that trail can be switched off at any time. I'm not going to pay three, four, five times the asking price for renewal income if there is a clause saying that it can be switched off."
Let the buyer beware
Barretts Financial Solutions managing director Kim Barrett agreed that businesses could no longer be priced based on their trail income.
He said: "Since RDR the FCA started to become very vocal on what it wanted to do with commissions and such things and I'd be extremely frightened and reluctant to take over a business on a mechanism times trail unless there were a lot of caveats."
Instead he would want to evaluate the real income of a business over a number of years before taking it over completely, he said.
He also suggested inheriting trail was potentially dangerous as the FCA was "very hot under the collar about receiving income and not doing anything for it". "Unless you very quickly write to the clients and establish some sort of rapport, the FCA would have a go at you for not 'servicing' the clients properly. You've got to be very careful now taking over a business without putting in all sorts of protections for yourself," he said.
Patrick Connolly, head of communication at national IFA Chase de Vere, suggested uncertainty over the future of trail commission should mean the costs of acquisitions will come down.
"This in-built value, as it has been seen, will be worth less in the future because trail commission is going to go," he said. He suggested firms would be well advised to increase their fees in order to bridge any gaps left by shrinking trail income.
"Value in the future will be based on fee agreements with clients."
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