Edition: March - May 2015


Hot on the trail

Can a client claim back fees for advice he hasn’t received?
SA proposal seems at odds with recent UK ruling.

Ordinary Joe calls his Trusted Advisor. “Please buy me an investment product,” says OJ. “I want it to run until my 60th birthday, when I intend to retire, and I want to pay R3 000 per month.”

“Good thinking,” says TA, who prides himself on his independence. He selects a product from an institutional offering and sends relevant forms along to the client. OJ dutifully completes them, signs the debit-order instruction and the transaction is effected.

No special advice was needed. OJ is nevertheless content that TA will receive a commission (usually by the product provider but indirectly by deductions from the client’s account) and is happier still to see that the commission entitles him to ongoing financial-planning advice.

Nothing extraordinary so far. But a few years on, when OJ turns 60 and wants to cash in, he checks his benefit statement and wonders why he hasn’t heard from TA since the policy kicked off. He feels distinctly upset that he’s been paying for a service that, quite simply, he hasn’t received. Unfortunately, there’s nothing too extraordinary about this either.

Now along comes the draft Retail Distribution Review, compiled by the Financial Services Board for public comment (TT Dec ’14-Feb ’15). To prevent interest conflicts, it proposes to ban the payment of commission to intermediaries by suppliers of investment products. This, says the draft, will be replaced by an advice fee that must be explicitly agreed upfront with the client.

It bristles with other worthwhile objectives. An important one is to ensure that “ongoing fees and/or commissions may only be paid if ongoing advice and services are indeed rendered”.

OJ likes this. He thinks it means he can claim back the ongoing fees for which he’s received neither advice nor service. He should think again. Tucked much deeper into this technical 97-page tome is a rider: “The payment of ‘trail’ commission . . . on pre-RDR assets can continue. However, any new advice on a pre-RDR product will have to be paid for by means of an advice fee paid for by the client.”

Too bad for OJ, it would seem. Because he has a “legacy product”, entered prior to RDR enactment, the commissions fall outside the scope of the RDR. They’re thus untouchable, presumably. Yet hang on a moment, for the RDR proposal had been completed before its drafters could have become aware of a ruling by the UK Financial Ombudsman Service against banking giant HSBC.

The ruling, published by FOS a fortnight before the draft RDR was distributed in SA, deserves to be considered for the possible impact on legacy products. Some in the UK investment industry have suggested that the HSBC case could have wider ramifications for advisers earning historic trail commissions (see box) from lapsed clients. Others contend that it is limited because it relates to specific clauses in the contract, between the client and the bank, rather than trail commissions more generally.

In essence, FOS ruled that HSBC must return trail commissions it took from the retiree after it had failed to give him ongoing pension advice. This contravened the contractual commitment for the bank to provide ongoing advice. The bank was ordered to repay the 0,5% trail commission it took over three years to 2009, plus an additional £350 for “stress and inconvenience”.

In August 2006 the client had transferred his existing funds to HSBC so that he could start taking “unsecured drawdown”, using the maximum tax-free cash initially as income between 2006 and 2008, leaving his residual pension pot invested. The bank had sent documentation to the client, making it clear that ongoing advice would need to be undertaken, but the client’s attempts to contact the bank – to review his income requirements – had failed.

In 2009 he complained to FOS. It noted internal memos showing that HSBC had withdrawn from offering advice on drawdown, yet had continued to take the 0,5% trail commission.

Now back to SA. There’s still time for the RDR drafters to take a good look at the FOS decision and consider whether their stance on whether legacy products be so broadly excluded from recourse. The question is whether clients, who’ve directly or indirectly been paying trail commissions for services not received, will be allowed a basis to claim them back.

It’s unlikely that clients, intermediaries and product providers will unanimously agree on the answer.


Here’s the Investopedia explanation, summarised and paraphrased:

Simply, it’s money you pay to an advisor each year that you own an investment. The purpose of the fee is to provide incentive for the advisor to review the customer’s holdings and to provide advice.

Fees vary, depending on the investment. It is not uncommon for fees to range between 0,25% and 0,50% of the total investment per annum. That is huge! And as the asset grows in value over time, the advisor that initially sold the product to you is making even more money.

On the one hand, it seems offensive that an advisor might receive an income in perpetuity based upon a one-time initial investment. However, if the advisor is being paid for how well your (investment) does -- and is actively reviewing your account and making constructive suggestions -- the extra fee is well worth it.