Trail fee shutdown could seriously affect business valuations

IFAs looking at exit options from their businesses through a business sale could see drastic drops in the consideration received, if the FCA implements a sunset clause for all off-platform trail commission, reports Gwill Evans, M&A Associate at Gunner & Co., boutique M&A consultancy.


According to recent FCA data, investment advisers are still relying heavily on trail commission, which accounts for some 26% of revenue across the industry.  “Banning this income stream poses significant threats to all advisers, but would also have a serious impact on those looking to retire from the industry” says Louise Jeffreys, MD of Gunner & Co.


“Far and away the most common valuation method being implemented across M&A activity is a multiple of recurring income, with adjustments throughout the payment term to reflect the actual income received.  Any income which is switched off during the deal payment periods would likely be negatively reflected in the total amount received for the business.”


Businesses that have implemented fee-based only propositions will be spared, however the data suggests there are a significant number of businesses that could be affected by this.


“The subject has already come up for many firms which have offers on the table – buyers are taking a deeper dive into how the recurring income is actually made up” comments Jeffreys, “standard contracts would flush out the lost revenue – at a loss to the seller.”


The proposal to shut down this income stream came as part of the FCA’s asset management market study, published on 28 June, where the regulator revealed “a number” of respondents had called for a total shutdown on all outstanding commission – a move fund managers said would enable them to “put all customers in the cheapest share class”.

Where investors remain in pre-Retail Distribution Review share classes paying commission to advisers, it is either because they no longer receive ongoing advice or because those legacy investments are still considered to be suitable.

The focus on legacy commission comes as a surprise, after the FCA stated in an interim report last November on their asset management market study, that it had “no plans” to revisit this topic. 

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