As the April 2016 deadline approaches for the cessation of trailing commissions, brought about by the recent Retail Distribution Review (RDR), UK investment advisory firms have made significant steps forward in moving their clients to clearly stated fees, according to research from Fidelity’s UK investment platform, FundsNetwork.
More than half of financial advisers expect to move their clients to fee-based arrangements by the end of 2015.
Historically, financial advisers received an annual commission paid as a percentage of the client’s investment. This trailing commission charge was not always obvious to the investor and potentially incentivised financial advisers to allocate investments to products with higher commissions such as active mutual funds. Conversely, products such as ETFs, which carry low management fees and pay no trailing commission, were often overlooked.
As advisers move to an unbundled, fee-based revenue model for their advice, the disincentives for ETF investing should be removed.
According to the FundNetwork survey, over half of firms now have 75% or more of their revenue that is facilitated via platforms, coming from fees. The research also revealed that 1 in 6 firms (17%) has already moved all of the clients they intended to move to fee arrangements already. Also encouraging was that 56% of those surveyed expect to move all the clients they ultimately intend to move to fees before the end of the year rather than wait until the deadline.
Jon Everill, Head of Advisory Services at FundsNetwork, commented: “As we edge ever closer to the deadline for the sunset changes it’s extremely encouraging to see that such significant strides have been taken by firms to engage with clients and agree fee arrangements where previously trail commission existed. At FundsNetwork, we will of course continue to support firms throughout the sunset changes but with only few months to go, we would also like to urge firms to continue making the necessary preparations ahead of deadline.”
The UK’s Financial Conduct Authority (FCA) put an end to trailing commissions on new business April 2014 following the introduction of RDR. The two-year grace period on legacy business comes to an end as of April 2016 and ushers in a new era of investment management which emphasises fee transparency and should favour low-cost investment vehicles such as ETFs.
European ETFs have seen tremendous new asset growth in recent years. This month ETFGI, an industry consultant, reported that the European ETF industry had pulled in a record $48.4bn in net new assets in the first seven months of 2015, well ahead of the prior record of $42.9bn set in 2014. As barriers such as trailing commissions are removed from the market we can expect the UK’s share of this growth to increase.