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Three clear questions for firms dealing with the sunset clause

Adviser firms yet to fully tackle the impact of the sunset clause on their business should ask themselves three fundamental questions, says Martyn Harrison, risk and governance manager, AXA Wealth

AXA Wealth continues to receive questions from advisers around the impact of the regulation of platforms on trail commission, and specifically what has become known as the ‘sunset clause’ that takes effect on 6 April 2016, reflecting the fact that firms are still working through the issues, says Martyn Harrison, risk and governance manager for the company.

Harrison, who specialises in the regulatory environment, says: “Some businesses have made the decision to just let the trail commission come to an end because it’s not significantly important to their business model. Instead, they are focusing their efforts on clients within their target markets rather than trying to manage what is a relatively small revenue stream to them.”

However, for advisory firms that are more reliant on the trail commission, with clients in bundled investments “which are paying them commission based on arrangements pre-April 2014 when the new rules for platform services came into force”, Harrison adds, they need to ask themselves three questions to ensure they deal with the issue in a logical manner.

1. How much of this type of remuneration do they have/how many clients are affected?

2. What’s the value of the revenue that will be lost/ how important is it to the business and to the value of the business?

3. Based on the answers to those questions, what action needs to be taken to manage the process?

Platform relationships

“The relationship a client has with a platform may well be different in an explicit charging world,” says Harrison. “Clients will see that they are paying specifically for a platform service, whereas before they may not have understood the exact position, as it was contained within the bundled charge.”

Also, he says, advisers should be aware that whatever the platform provider might do to resolve the issue in respect of dealing with the platform charge, such as transferring to a clean share class, it will not cover the adviser charging side. “The advisory firm will need to set up adviser charging arrangements and I would suggest they are proactive with clients, explaining to them the following:

• What’s going to happen

• Confirming what the advisory proposition is

• The value of that proposition; and

• Why the firm uses a platform and how it benefits the client.

“All of these questions will need to be addressed,” Harrison says. “Clearly, firms will be doing this with all their new clients in any event and with clients that are on explicit charging already, but it will help if they think about a plan to manage the clients on bundled charges, perhaps tackling the issues during the annual review process, so that the clients know what will happen in April 2016 and the firm can effect as smooth a transfer as possible into what may be a new way of working.

“Clients need to understand that they will be paying a certain amount to the fund manager, a certain amount to the platform and also a fee to the advisory firm. Firms will have to walk their clients through that and there will be things that the client needs to agree to in order for things to progress.

While “there is nothing new in this”, Harrison says, the rapidly approaching deadline is significantly increasing the pressure on firms that have yet to deal with these issues.

Platform plans

Equally important for advisers in dealing with these issues is that they find out from platform providers what their plans are in respect of managing clients in retail share classes, Harrison points out.

For advisory firms the issues are:

• Do they understand the plans of the platforms they are using?

• What are the timelines?

• Which clients are affected (the platform provider may be able to help with this); and

• The putting in place of plans to manage and migrate those clients (where necessary) to a different way of working in respect of the explicit charging structure.

“Even if the platform says it is going to bulk transfer all of a firm’s clients into clean share classes, avoiding the need for the adviser to do it on an individual client basis, there is still one piece of the jigsaw missing; agreeing the level of adviser charges with the client and setting up a payment mechanism,” Harrison adds. “The adviser will still need to get involved and deal with that. The FCA highlighted the role of advisers in the conversion process in its Finalised Guidance on changing customers to post-RDR unit classes published last May. I would suggest this gives the adviser the opportunity to pre-empt the changes and to make sure that, as well as adviser charging, any relationship issues are also managed,” he says.

Harrison points out that AXA Wealth’s Elevate platform has operated an explicit charging model from launch. “It was built with this method of charging in mind,” he says.

Visit AXA Elevate website

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