Switching a financial advisor business model away from commissions to fees is not as straightforward as regulators and policymakers might imagine, leaving clients in need of help, a senior manager at Towry says.

Towry likes to pride itself on charging only fees to new clients, rather than getting paid upfront and with trail commissions from product providers. The firm recently spoke about its business model in an interview here.

But some clients now under the Towry umbrella are still paying for services and products in the old way. This stems from when John Scott & Partners acquired the old Towry Law business in 2006. Towry Law had operated trail commissions while its acquirer did not. The firm recently dropped the word “Law” and is now just known as Towry.

One of the benefits of a business acquisition is that Towry can talk to clients of an acquired company and advise them, in many cases leading to those clients moving to new services/products where a trail commission does not apply, David Middleton, head of client proposition at Towry, told this publication in a telephone call yesterday.

“We don’t publish data on our trail commissions but they have fallen dramatically,” he said.

“We have bought companies who had been paid a commission by a product provider for selling those products. That commission is sometimes constructed of an up-front commission and deferred commission, otherwise known as a trail commission.”

Deadline

The issue is pressing because the Retail Distribution Review, a programme of reforms of the UK financial regulator, comes into force in January 2013 and among its measures is a clampdown on commissions. The RDR is designed to make financial advisors genuinely independent.

Traditionally, many financial advisors have used commissions as a key income source. It has been feared that the RDR, which also pushes for higher training qualifications from advisors, will drive thousands of advisors out of business.

Another issue is how firms engage with clients after January 2013 where those clients had had services sold to them on commission, Middleton said. “One of the concerns that has been expressed by us, and something that comes out of the RDR, is that people are sold products that have paid quite a high trail commission and going forward, they are not advised as to what to do with that product.”

There are no incentives for an advisor in these sort of circumstances to talk to their clients when the new rules kick in, he said.

Middleton described the changeover from the “old world” of commissions to the “new world” of fees to be a difficult one. “We have already gone through that change in terms of the mix of our revenues. This is a serious business challenge,” he said.