Since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry began there has been a lot of noise around the banning of grandfathered commissions as somehow being immoral and representing ‘fees-for-no-service’. This may be true in some instances however many commission based clients are receiving levels of service similar to the fee paying clients.
Conflicted remuneration is defined in RG 246 as any monetary or non-monetary benefit given to an AFSL or its representative which could reasonably be expected to influence the advice they provide to their clients or the products recommended to them.
Examples of conflicted remuneration are:
Commissions (whether upfront or trailing, fixed or variable) paid by a product issuer to an AFS licensee, either directly or indirectly. (Excluding life insurance products in certain circumstances).
Volume based benefits calculated by reference to value or number of financial products acquired by clients.
One of the strange anomalies of the difference between fees that are conflicted and those that aren’t, is determined by the application form that was completed at the time.
If the application form provided a space for the client fee to be entered (eg. O.6% of FUM) and the client has been advised that there is a fee and that by signing the form they are agreeing to the fee then this is not conflicted remuneration but is an ‘ongoing fee arrangement’. However, if the Product Disclosure Statement simply stated that a fee was payable to the adviser (eg. 0.6% of FUM) then this is considered ‘commission’ and is therefore conflicted remuneration.
For most financial planners operating a business post 2001, when the Financial Services Reform Act made it compulsory to disclose fees and commissions, this difference in forms and what box was completed was immaterial as the fee had to be disclosed in the Statement of Advice. It is highly likely most advisers didn’t give it much thought and probably just kept using the forms and process they had always used.
So when RG 246 and the grandfathering of conflicted remuneration came into effect for arrangements that were in place prior to 1 July 2013 some advisers found themselves in either the grandfathered or non-grandfathered camp, more by chance rather than by design.
Financial planners probably didn’t treat their clients any differently considering that they were receiving the same 0.6% of FUM regardless of how it was received. But from 1 July 2013 everything changed as RG 245 required the ‘ongoing fee arrangement’ clients now had to be sent an annual Fee Disclosure Statement, whilst the grandfathered ‘commission’ paying clients did not.
Surely there is no difference between which fee you charge a client (i.e. the amount) and how you collect the fee (i.e. invoice, direct debit, credit card, 0.6% of FUM)?
Whilst volume based benefits are more difficult to quantify per client there seem to be three main ways that the financial service industry can deal with the issue of banning grandfathered conflicted remuneration when it comes to commissions:
1). Stop paying commission to the adviser and allow the product provider to keep this revenue;
This option would result in many financial planners losing a substantial portion of their annual revenue, in some instances 50% or more and that would be financially devastating to those planners. Even if there was a period of transition, a lot of time, money and effort would be wasted in moving clients onto different fee arrangements or off certain investment platforms.
2). Stop paying commissions to the adviser and reimburse it to the client;
This option would certainly benefit the client as they would receive the benefit rather than the product provider, however the relationship between client and adviser would surely need to be discontinued unless the industry wants to legislate ‘service for no fee’. Also the problem of financial planners businesses being financially devastated would remain.
3). Treat grandfathered conflicted remuneration in the same way that ‘ongoing fee arrangement’ clients are treated;
This option seems to be the fairest and the simplest, the legislation already exists to implement it, RG 245 could be used as the basis for the new rules and advisers already understand it and have set up systems to deal with the requirements. Grandfathered clients would begin receiving an annual Fee Disclosure Statement giving them more transparency around fees they are paying and allow them to choose whether to discontinue these fees and their relationship with their adviser.
As an industry we need to get back to the premise that most financial planners are good honest people that want to do the right thing by their clients and have spent many years building up their businesses within the rules that applied at the time. They certainly don’t deserve to be financially devastated for the bad behaviour of the larger institutions and a minority of individuals.
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Jeepers creepers!
If all the crap that’s gone down in this industry and all the accusations advisers have been labelled with recently had have been happening when I first joined this industry ten and half years ago, I wouldn’t have joined! Period!
It’s just laughable how regulators continually focus on the spec on the windscreen now and not the big picture – which are the huge benefits we provide consumers each year through our advice.
Everyone deserves to be paid for the work they do. Advisers not “earning their keep” will be caught out naturally by consumers who know they’re NOT getting any bang for their buck, who will eventually just take their business elsewhere. No free lunches anywhere these days!
Its the minority of advisers once again though that our blessed regulators want to focus on! Pfffft!
The real issue is the number of advisers who do NOT advise their clients- merely take the commissions as a right and not advise. If the client is receiving advice, there should be no issues, especially if disclosed. The advisers not servicing clients and still receiving commission are the problem. Most in this category are wary of disclosure as the client may walk, especially if they have another adviser and forgot about the product in question.
If the client has a new adviser how could they forget about an investment product they implemented by a previous adviser ? There is no way of knowing how many clients are not receiving ongoing service just as there is no way of knowing how many superannuation executives are earning their salary. If the later want to start making decisions on adviser remuneration we should have the opportunity to review their remuneration packages ( which are also paid out of client funds ) and commence a process where these are reduced on the assumption that they do not deliver value using the banks and AMP executives behaviour to make assumptions of their behaviour.
Agreed. Another factor behind retaining an ongoing commission rather than converting to a service fee was GST. The ongoing commission received a GST credit whereas the adviser fee did not which resulted in a lower cost to the client to retain the ongoing commission. There is a real danger in the misbehaviour of the large institutions ( charging dead clients fees for goodness sake ! ) being applied to all advisers and then groups such as Macquarie and BT coming out to purge their past sins by becoming crusaders of abandoning grandfathered commissions which are in many cases a reasonable basis for advisers to be remunerated for the ongoing advice and service they provide.