Categories:Investments

FSA must ban trail commission, says Terry Smith

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City veteran Terry Smith has called on the Financial Services Authority (FSA) to ban the payment “of all trail fees” as part of the retail distribution review (RDR).

Terry Smith

Terry Smith

Smith, founder of FundSmith, says the platforms receive trail fees and “have a vested interest in management fees remaining high enough to pay their trail fees”.

He says: “The need to pay these trail fees means that fund managers have to charge enough to cover their own costs and profit margins plus the trail fees to the platforms.”

The City veteran says the payment of trail fees introduced an “insuperable conflict of interest”. (article continues below)

He says: “Will a platform carry a fund which does not pay trail fees, or sufficient trail fees, no matter how good its performance? The answer is of course not.”

He adds: “To be effective, RDR would need to ban the payment of all trail fees, with the platforms being paid by charging investors for administration and advice.

“Any bending of that principle would leave in place conflicts of interest which will serve investors badly.”

 

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Readers' comments (21)

  • he might be right, but given he has speant a couple of minutes in the asset management industry, having previously been an inter-dealer broker, i won't be paying to listen to him

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  • That's rich coming from a man who's company manages 'one' fund, with three share classes including a retail fund with an AMC of 1.5% -paying trail.
    Maybe be an ex Barclays anker he'll think that 7% initial commission and no trail is the best way forward.

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  • And will Terry Smith be reducing the AMCs of all of his funds as they get bigger and only charge fundholders an AMC rate based on the actual costs incurred in managing the funds. He, other asset manager and insurance companies and many others are against percentage commission charging by everyone else except themselves. It will be very interesting to see when RDR kicks in fully whether AMCs get reduced and the commissions not being paid to advisers on assurance, insurance and pension products will be fully reflected in premium reductions etc. I bet they will not be. Standard Life were found out last year to be not doing this on business done through fee charging IFAs.

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  • He clearly hasn't come across wrap yet then?

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  • Where is your qualitative, or quantitative evidence to support your opinion that trail commision would lead to conflicts of interest and serve investors badly.

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  • I absolutely and totally agree. Terry's argument is a matter of fact, rather than opinion. Like it or not, paying trail commission creates a conflict of interest. Trail commission must be banned even for so-called ‘execution only’ platforms that are happy to promote even a poorly managed fund over and above an outperforming fund simply because it pays more trail commission. Platforms should be allowed to charge Fund Managers for making funds available on their platform – the fee should reflect the distribution that the platform provides. It should be the same fee arrangement for all Fund Managers, which is paid by the Fund Manager – but not through their ‘management fee’ or charged back to the fund. The manager should consider it as a cost of doing business. The Platform should charge investors for their service. This will serve to increase competition in the platform space in terms of price, service and innovation. All of which are great outcomes for the end consumer. It’s time for the retail distribution model to move on and become more relevant… it the reason why platform development in the UK is light-years behind other markets e.g. where platforms charge investors for their functionality rather than being remunerated by trail commission.

    John Smyth - Fund Managers charging a percentage based fee (and capping them) is a completely separate debate. The topic is RDR and trail commission creating a conflict of interest.

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  • Is it any wonder that people are leaving the advice business by the bus loads?

    All the public will be left with to give them advice will be their trusted banks!

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  • Has anyone actually asked clients about what they think of trail commission in this whole RDR debate ? RDR looks more and more like a talking shop for the middle aged balding men that appear to infest the finance industry. They need to stop talking about non issues like the ins and outs of fees and more about why they still consistently fail to deliver on their investment promises to customers then hide their results in jargon. Also why their industry is run by a regulator that has let the British Public down on so many occasions and destroyed public faith in placing money in their institutions. This whole RDR issue is simply rearranging the deck chairs on the Titanic until basic public trust and confidence is restored in the industry. Pay up front, or pay out of charges really makes no difference to anyone except those trying to make a name for themselves in a dying industry.

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  • Just shows that Nobody understands IFA models.There are so many of course.What a stupid comment.Uninformed or what.

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  • Anonymous | 16 Feb 2012 3:46 pm

    The reason he has a retail share class charging 1.5% is because that’s the retail distribution model in the UK. I’m guessing he’d pay 0.75% to the platform who will then pass on 0.25% to the adviser. That’s how retail business is done in the UK!

    Clearly by Terry’s comments, he’d rather just charge 0.75% (using the example above) and let the platforms charge their own fee to the investor which reflects the function/service that the platform provides. And the advisers should negotiate their own fee with the client which should reflect the complexity of advice and level of service.

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