Trail commission (TC) is paid by investment management companies to financial advisers, and is generally around 0.1% to 0.9% p.a. of the value invested by a client.
If an investment is made directly through a financial adviser, TC is generally kept by the adviser. However, some agencies (for example Commsec) return half of the TC to the client.
A financial adviser should act purely in the investors' best interests. However, it is possible that the financial adviser may direct the investment towards funds that are most profitable in terms of TC. Supporters of the directing of investments into funds benefiting the financial adviser claim that it encourages the adviser to maintain the value of the portfolio, thus aligning their interests with those of their clients. Detractors suggest that investors are usually unaware of the practice and that it is ineffective as an incentive.
Following the Retail Distribution Review in the United Kingdom, trail commission is banned on sales of new investment products as of April 6 2014 and will required to be completely phased out by April 6 2016.