The Big Switch-off: prepare for Sunset?

With the banning of rebates for platform providers, all trail commission/fees will be turned off by 6th April 2016 at the latest. This could mean the loss of many thousands of pounds for many firms unless urgent action is taken. Yet, it could also be a great opportunity for advisers to grow business and ensure good consumer outcomes.

On average, IFAs could see £20,000 wiped off their annual revenues in the coming months, and 49% are unprepared for what they need to do to protect their business. If you are one of them, the Academy can help you by providing a tailored revenue preservation strategy document for you in just 24 hours, based on your cash flows and client service agreements.

The FCA’s Policy Statement PS13/1 switches off trail commissions, the payments have already started to go with providers contacting your clients, and will all but disappear by April 2016 (the ‘Sunset Clause’). So, you have six months to prepare for your last pre-sunset annual client reviews, to re-adjust your ongoing service payments to adviser charges. If you want help building your sales and service processes ahead of these reviews, in order to protect and grow your recurring revenues, the Academy can lend a helping hand.

Nigel Barker-Smith, running his own IFA firm in Leeds, says: “The Academy pointed out all the work we did for a client that the client values and would pay for, and yet we were barely charging enough to cover the cost of the review meetings. We had £3,000 per month trail commission at risk, and in just 24 hours the Academy had found us in total an additional £10,000 per month adviser charges that the client would value and pay for”.

The Academy of Life Planning Limited (AoLP) is a co-operative of dedicated and experienced financial service professionals and business developers who offer their unique talents on a consultancy basis to help firms navigate the difficult challenges ahead. If you would like to talk about your particular circumstances, and find out more about us, we offer an hour introductory Skype meeting at our expense. If this is of interest to you, please Email me, Steve Conley, at steve@aolp.co or call me on my mobile on 07850 102070 to arrange a meeting.

Telling you more about what we can do

  1. As it is …

On average, every adviser stands to lose £20,000 per annum in trail commission linked to inactive client relationships, starting now and finishing in 18 months’ time. You will no doubt be preparing your firm for those final conversations with clients still on trail commission; the conversation about re-adjusting ongoing service payments to adviser charging. As your last annual client reviews before the big switch off are almost upon you, some meetings may have passed already. You may be aware that some providers have already communicated to your clients asking if you are still in touch and servicing them, and a few, such as Standard Life, have already started bulk converting clients to clean share classes, with others preparing to follow suit as early as mid-2015, i.e., Co-funds, Skandia and FundsNetwork. So in the next few months you will need to have re-evaluated your client bank and ongoing service proposition, and know exactly what you are going to say to your clients. We can help.

  1. How this impacts on you and your practice?

Latest research suggests that a half of advisers are still confused about the sunset clause, the practicalities advisers will have to undertake in order to avoid any impact to their income and the potential regulatory implications.

In Policy Statement PS13/1 the FCA confirmed its commitment to create more transparency for the consumer. This policy statement came into effect on 6th April 2014 and, with it, changes to the way in which platform providers were able to accept and handle rebates they received from the investment funds. This created two significant changes for many platforms, as not only would they have to charge the investor directly, but also offer clean share classes. The implementation of these changes created a number of logistical issues for platforms and advisers which were fully recognised by the FCA. Whilst these rules apply to new business from the above date, the sunset clause allows platform providers the period up to 6th April 2016 to implement these changes to all their legacy business.

You are impacted because platforms and fund houses decided that they were going to move to clean share pricing, to avoid having to unpick trail commission bundled into the fund pricing to be paid to you. So your trail commission stops.

The FCA is also considering levelling the playing field and extending the same principles to non-platform products, such as investment bonds and pensions. Some Life and Pension companies, such as Aegon, have already explored turning off trail commission, unless the client still confirms that they are in touch with their adviser. You can, and should, expect all trail income to stop in the not too distant future.

  1. So what does this mean for your business?

Some IFA firms we have worked with knew that they had to look at their ongoing service and investment propositions in readiness for these client conversations, but were a little unsure how to go about it.

We found:

Trail commission represented up to 50% of recurring revenue for some of our firms, equivalent in some cases to what the IFA was personally drawing from their business in terms of salary and dividends.

These firms typically left no profit in the business, so when the trail went, so did their personal drawings.

The valuation of these firms was unprotected, as valuations are typically based on a multiple of recurring revenue or profits. So the value built up in a firm over a lifetime was put at risk

These firms typically provided a number of ongoing services for their clients for which they were not making the appropriate level of charges; such as year round office services, ongoing review meetings, planning and modelling or investment service propositions.

Firms had re-evaluated client banks to tick boxes for RDR, but had not properly segmented clients for specific service propositions, and had not written to clients with options for fair and honest service solutions with explicit transparency on costs.

  1. By working with these firms we were able to:

Review cash-flow forecasts, against client service agreements, to identify revenue opportunities; that if acted upon could potentially protect the firm from loss of trail commission, and in some case create additional revenue and hence value for the practice principal(s).

Analyse client banks to identify specific customer segments for targeted ongoing service propositions, and propose a practical approach for each client conversation about services and pricing, on a client by client basis.

Propose an alternative approach for clients who might no longer fit the firm’s service, that would still bring recurring revenue into the firm.

Write out a sales process and develop a centralised investment proposition that reduces conduct risk for the firm, and at the same time, generates recurring revenues based on assets under advice.

Source the technology and expertise necessary to facilitate the change successfully.

  1. Trailing off, means legally disengaging clients:

Don’t just bite the bullet on loss of trail and consider it job done. You have to legally disengage the client to limit firm liability. Where trail is stopped, consider disengaging clients via a formal process evidencing the arrangement. In the absence of disengagement, you may still remain on the hook for advice given. If you do nothing the platforms and providers may disinvest non-responding clients, busting them out of ISAs and clocking up CGT bills. Some clients can’t be disengaged, as the platform will require the appointment of a new adviser, and few would be willing to take on a client with insufficient wealth to warrant your ongoing service proposition. Some providers, eg Novia, even apply an additional 0.5% fee if your former client does not obtain another financial adviser within a month of them being disconnected from you…..seems unfair, but that is what is happening as we speak, so advisers need to look at this entire issue in a more detailed manner.

  1. Our credentials:

We are a firm of ex Chartered IFAs and industry leading proposition architects, helping firms just like yours. Whilst our primarily focus is on serving the ‘underserved’ clients, i.e. the ones who might no longer fit your business model, at the same time we are also looking to help regulated firms, like yours, profitably and sustainably serve the served. We can also provide you with the opportunity to earn on those clients you choose to exit from your business. In essence, we complement each other, and that’s how we can work successfully together.

The expertise in our team:

  • IFA practice principals (direct and AR)
  • Compliance officers
  • Chartered Status
  • Registered Life Planners
  • Market leading investment product managers
  1. Our proposal

We help you to fully understand the content of paper PS13/1, the implications this could have on your firm if not addressed and the need to have a robust system in place to facilitate a move to adviser charging for existing clients.

The fact that we are writing to you has already demonstrated that you are an RDR survivor, and are an adaptable and resilient firm.  You are not about to let your business sustain damage at this late stage by failing to prepare properly for these coming changes.  For you, administrative tail-chasing is not an option. For a cost of just one day’s consultancy charges, we can prepare an operational overview and risk report, based on your bank reconciliation or cash flow forecast, together with your client terms of service, to show you revenue opportunities that can more than compensate for your loss of trail commission.

Make your business process changes in a controlled and timely manner. We can advise you on the practicalities advisers have to take in order to avoid loss of income and the potential regulatory implications.

The Academy of Life Planning Ltd has its registered office in Clint in Harrogate. It provides Life Planning and Financial Education with planners based in Yorkshire, Lancashire, Essex and London. Founder Steve Conley was former head of investments at HSBC until 2012, when he left to set up the Academy to serve the underserved.

We are a co-operative of dedicated and experienced financial service professionals and business developers who offer their unique talents on a consultancy basis to help firms navigate the difficult challenges ahead. If you would like to talk about your particular circumstances, and find out more about us, we offer an hour introductory Skype meeting at our expense.

If this is of interest to you, please contact us today to find out more, Email me, Steve Conley, at steve@aolp.co or call me on my mobile on 07850 102070 to arrange a meeting.

See our website on http://www.aolp.co/what-we-do/financial advisers/ .