Their rationale is that in some situations, fund fees are high as they include a trail commission of 0.2-0.5% of the fund value which is paid to financial advice providers (FAPs) regardless of whether clients receive ongoing advice or not. This is not a banning of trail commission, but it does signal a general trend on where the FMA would like to see product providers go. The concept of ‘value for money’ may over time extend to other sectors of the industry e.g., personal risk products.
How might this impact upon FAPs and fund managers?
Fund managers
Fund managers may need to start considering:
- Setting minimum service standards that FAPs will need to meet to continue to receive trail commissions.
- How they will prove that clients are receiving financial advice for the trail commission being paid.
- Separating trail commission from the product fee so that only those clients receiving financial advice pay the advice fee. The advice fee is negotiated between adviser and investor and deducted (with client consent) from the client’s investment account.
- Bringing inhouse those investment clients not receiving advice and either service them internally or else pass to a FAP which the fund manager has confidence can and will service the clients.
FAPs
FAPs may need to start considering:
- The value of investment books they are looking to buy or sell – will values potentially fall?
- How to service a large number of small revenue-generating clients – how many additional advisers are required and what technology solutions will be needed?
- How they will provide proof to a fund manager that they are meeting the required client service standards.
- Whether it is commercially viable to retain low revenue clients.
Contact the Strategi Compliance team if you would like advice and assistance to meet any the considerations listed above.