The latest news from the Opes Prime saga, scandal might be a better phrase, sees the ugly impact of trailing commissions raising its head. The Australian reports today - How Opes snared its rivals' clients - that brokers were offered trailing commissions of 0.75% by Opes Prime to encourage clients to hand over shares to Opes. This is in comparison to commissions offered by conventional margin loan operations of between 0.25 to 0.65% for books of more than $10 million.
Opes Prime claim that the major attraction of their service was the ability to get finance to enable the purchase of shares in small to medium sized companies. Even if this was the case, the perception could easily be reached that brokers were recommending their services to clients because of the improved returns for them as brokers. As I have grown to realise, a person's perception is their reality.
This case provides another example of where trailing commissions are not in the best interests of investors. When the result is that advisers, in this case brokers, choose a particular service or product based on the money they will receive back from that provider rather than a pure consideration of which service is best for the client, client's are losing out. Unfortunately in some cases, let's never forget the Westpoint disaster as another example, the impact on investors is much worse than the small percentage of trailing commissions that are being paid.