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The big trail loophole - will discretionary fund managers get caught out?

by Elsa Buchanan on Feb 18, 2014 at 09:39

The big trail loophole - will discretionary fund managers get caught out?

Ill-prepared private client firms could feel the heat if the Financial Conduct Authority (FCA) presses ahead with an outright trail commission ban for discretionary managers.

While after 1 April, advisers and platforms will not be able to take trail commission from funds on new business and have two years to eradicate any legacy rebates, discretionary fund managers (DFMs) are not subject to the same restrictions.

Whether discretionary firms want to admit it or not, trail could still account for a chunk of their income. Some suggest that planning for an outright commission ban might be the best course of action.

For businesses that have discretionary fund management as their primary proposition, trail is still ‘likely to still form part of their budget and provide a significant slice of revenue’, in consultant Mike Browning’s view.

While he advises DFMs to manoeuvre out of trail-paying units now, he said the impact of a broader FCA ban will depend on ‘how well prepared and organised they are’.

‘By now they should be preparing budgets where trail is not part of the profit and loss forecast or cash flow,’ Browning said.

Compromising discretionary propositions

George Kirby, a consultant at Knadel, agreed most discretionary firms had recognised the need to move all their clients into clean share classes, although the decision still depends on the firm’s business model.

‘In a less centralised model, a lot of advisers can stay in dirty share classes until they have to do new business for clients,’ he explained.

While trail does not form a significant part of its revenues, Charles Stanley has not yet rolled out a centralised policy regarding trail commission for its discretionary business, preferring to leave it at the discretion of individual brokers.

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