Here Kevin explains what trail commission is and what you can do to ensure it’s your wallet that’s bulging and not your advisor’s…
Trail Commission was historically paid from the annual charges that applied to the value of investments such as Unit Trusts, Equity ISAs, Investment Bonds and some Personal Pensions. It can be paid indefinitely, straight to your financial advisor. Since the ‘Retail Distribution Review’ (RDR) came into effect on 1 January 2013, advisors will no longer be able to receive trail commission from any new investments that they recommend, however, they are able to continue to receive it from investments you have made prior to 31 December 2012.
Often Trail Commission is around a 0.5% of the annual charge and on the face of it the cost may not sound like a bank-breaking amount. However, if you consider a portfolio of £150,000, applying a standard 0.5% annual trail commission charge and with an investment growth of a modest 6%, the advisor’s commission will amount to £7,709.37 over 10 years. That’s a lot of financial advice you should be receiving to ensure you are getting value for money!
Perhaps the most important question to ask is: What have I received from my financial advisor for this money? In my view, advisors should be furnishing you with regular valuation reports (updates on how your investments or pensions are performing) and offering to meet up with you at least once a year to find out how your circumstances have changed and to review your portfolio and your overall financial planning. If you are receiving this level service then £770 per year will seem like money well spent.
However, this isn’t everyone’s experience. One client that recently came to us has hadn’t any contact from the financial advisor that arranged his investments for seven years and didn’t realise his advisor was still getting the trail commission from his investments! The advisor meanwhile had received more than £10,000 over this period!
If you’re not happy for your advisor to continue to receive trail commission then there are things that you should consider before taking action to stop it:
1. Understand the potential downsides of making changes. Are there penalties or charges? What about tax consequences?
2. Where will you source independent financial advice in the future and how do you want to pay for the level of service and advice you require?
Radio Four’s Moneybox programme recently suggested trail commission was ‘an incentive to do nothing’ for financial advisors so you need to make sure that your advisor is doing something, and if he/she is not, then you need to do something about it.
Kevin Edwards is a Chartered Financial Planner, IFA and Director of Derby-based Midland Financial Solutions. In 2011, Kevin was the first person in Derby to achieve Chartered Financial Planner Status and has been a Director of Midland Financial Solutions since 2009. Kevin currently manages an investment portfolio of over £10m for a range of clients across Derbyshire & Nottinghamshire.