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Legacy assets and the sunset clause

There’s major trouble brewing for adviser firms as trail commission looks set to be turned off sooner rather than later – and don’t think you can just divest your business of orphaned clients, warns FinalytiQ MD Abraham Okusanya

No matter how you dress it up, there is a major storm gathering over legacy asset, on and off platform.  When you think about the implications of the sunset clause introduced in FCA Paper PS13/1, FCA closed-book review, and the increasing administrative nightmare associated with managing client’s asset off platform, it takes no imagination to conclude that a major trouble is brewing down the road for many advice firms.

According to a June 2014 survey by FundsNetwork, 49% of adviser firms are confused about the implications of the sunset clause and most have very little clues as to what is actually expected of them. Add to this the fact that platforms differ in the ways they are approaching this issue, and what you get is a very worrying picture.

Some platforms will eventually force clients into clean share classes, other are suggesting (or is that pretending?) there is a different way. Some platforms have suggested they may end up disinvesting orphaned clients who don’t respond to their communication and in the process, create unnecessary tax liabilities for those poor souls. Some platforms may turn off pre-RDR trail, others may not. Whichever way you look at it, there is no easy way out for advisers but doing nothing is definitely not an option.

Trailing off

Perhaps the most pressing threat on legacy asset is the PS 13/1 sunset clause, which means that from April of 2016, platforms can no longer keep fund rebates on legacy business as payment for their services and have to make explicit charge to the investor. In theory, nothing stops platforms from continuing to pay trail to advisers on pre RDR business but anyone expecting this to be business as usual is living in dreamland. Platforms could, in theory, just make an explicit charge for their own services and rebate what they used to get from fund managers back to clients. But remember, most fundsupermarkets previously negotiated deals with fund managers, so the numbers don’t quite add up anymore. Also, the ban on cash rebates (except in very specific instances) means rebates would have to be in units and creates a tax liability for clients in General Investment Accounts.

I sometimes hear advisers say that they have until April of 2016 to deal with this. Well, they don’t. Platforms are not going to sit around and wait until the deadline. In fact, it is expected that some platforms will start mandatory conversion to clean share classes as early as middle of 2015. So, if you have clients on supermarkets like Cofunds, Skandia, FundsNetwork et al, on pre RDR trail commission, you have months rather than years to prepare your business for the change.

Off-platform legacy

A different but related issue is pre-RDR trail commission derived from non-platform assets, i.e investment and pension business placed directly with life companies, SIPP providers and fund managers. They fall outside of the PS13/1 remit and are probably not under immediate threat. But here is a very good question: What stops a life company from switching off trail commission on pre RDR legacy business? Some commentators have argued that there is a contractual obligation on providers to keep paying trail commission. I wouldn’t be so sure. A case in point is a recent decision made by Aegon to turn off trail unless clients confirmed that they are still in touch with their advisers. Aegon later backed down due to industry pressure but if such a contractual obligation exists and is completely watertight, why would Aegon feel confident it could breach it?

So called ‘orphaned clients’

One big myth around the sunset clause is that advisers could simply sit and do nothing if they don’t want to deal anymore with particular clients (usually the lower-end clients with less than £50K invested) and are prepared to lose trail commission by April 2016.

Here is the thing, just because a platform turns off trail doesn’t mean the client is no longer the adviser’s client. Unless an adviser formally disengages with the so called ‘orphaned client’, the adviser may still carry the liability for placing the business on the platform in the first place and for whatever happens afterwards, even if they are no longer receiving trail! In addition, some platforms have suggested they are prepared to disinvest non-responding orphaned clients, which means those investors face losing their ISA tax-efficiency permanently and could even receive a CGT bill as a result.

I think advisers are opening themselves up to some liability here. Unless an adviser formally disengages with a client, stops receiving trail (ideally well before the platform forces share class conversion), it is totally conceivable a client will have good grounds for complaint, if subsequent action by the platform results in detriment to the client. It won’t be long before the ambulance-chasing claims management companies smell blood.

Oh and good luck disengaging from clients on some of the platforms. Apparently, unless they are assigned to another adviser on the platform or move elsewhere, you can’t!

Investment suitability

The risk of losing trail on legacy business is only half the worry for advisers. Assuming advisers manage to avoid losing trail with the least effort possible, can they really afford to keep clients in the existing portfolios and service them going forward?

Most firms have invested a considerable amount of time and effort redesigning their investment propositions in the run up to and following the RDR. Chances are, their new investment proposition is very different from the one their pre RDR legacy clients signed up to. Is the existing investment suitable and compatible with client risk profile? Is that evidenced and documented somewhere? Should they move legacy clients to the new investment proposition? Migrating clients often comes at significant cost to firms, and without appropriate technology and expertise in place, it could easily become a major nightmare.

Keeping a client in an existing portfolio of disparate funds places an onus on advisers to keep that portfolio under regular review, which includes fund review and rebalancing to make sure that the portfolio is within their risk profile. The administrative tail-chasing that results from all this means it’s probably not a viable option for most.

So what to do? Leverage technology for the migration process? Disengage with the clients and lose the trail? Offer an execution-only option? Advisers need to start thinking and taking action on this sooner not later.

Further information

The MIGRATE workshop for adviser firms on the legacy asset situation is being hosted by FinalytiQ on 10 September. See the MIGRATE box in the sidebar or click here for further details.


Click here for more information on FinalytiQ



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