In a letter to commissioner Hayne, seen by ifa, AIOFP executive director Peter Johnston warns against the proposal offered by ASIC and the FPA to end grandfathered commission payments despite their current protection under the Future of Financial Advice legislation.
While conceding that grandfathered revenue is “not a perfect scenario”, the letter informs Mr Hayne that that a recommendation to ban it would not alleviate conflicts identified in the royal commission relating to vertically integrated wealth management businesses and SMSF specialists.
“It would be totally unfair and blatant discrimination to take away this revenue stream from independently-owned practices when institutions and SMSF advisers can cross-subsidise advice with their activities,” the latter stated.
“Vertical integration allows institutions to cross-subsidise their aligned advisers operating costs, which inexplicably is permissible under FOFA. SMSF advisers can operate in a similar fashion to product manufacturers by offering their own administration services and then deal in direct property outside of ASIC jurisdiction to cross-subsidise their practice expenses.”
The letter says the AIOFP endorses the work of the royal commission in shining a light on these conflicts of interest.
It also suggests that in some cases grandfathered revenue may be in the best interests of consumers and therefore in line with the spirit of FOFA, particularly in cases where clients are invested in legacy financial products.
“Consequently, a blanket approach to this issue will not work,” the letter stated.
“The AIOFP recommends that grandfathered revenue should remain in place, FOFA’s best interests duty should be allowed to do what it is designed to do: ensure that advisers are selecting the best strategy for their clients’ specific circumstances and if they don’t, they face the legal consequences.”
The AFA has also argued against the removal of grandfathered revenue.
What is wrong with asset based commissions. If Assets rise its a win/win and the adviser should benefit for being in the right asset classes.If assets go down both lose and that too is fair.
Please leave the industry. Thanks.
Please leave your ego at home! Thanks twat.
The fact that you are asking that question is absolutely shocking. I weep for this industry when this kind of question is being seriously posed by advisers.
What many, including the AIOFP and many commentators on here have failed to realise, is the only reason the industry is so over regulated is due to the industry failing to self regulate. The FoFA reform was a golden opportunity to reset and move forward, instead was watered down due to lobbying of vested interest groups. To be labelled a profession, conflicts can’t be disclosed away, but rather must be avoided. Unfortunately, all this kicking and screaming is just showing that the industry is not ready to be a profession and will only create another layer of compliance requirements.
Yes I know many good people rightly or wrongly built their businesses on trail commission, but all good business must evolve and as Netflix built its business on Mail order DVDs before changing with the times, so too advice business must decide whether they will be a Netflix or a Blockbuster.
Some recent research stated that 20% of bank advice revenue is of trail commission, but 45% of average IFA revenue is trail commission. Why is this? Banks have actively been moving clients from expensive legacy products into more modern alternatives, whilst many IFAs have avoided even contacting these clients in fear of losing their lucrative income source.
Way too much common sense, forward thinking and not nearly enough defence of the old, lazy ways of doing things here.
Ah wrong. A large part of the over regulation is the Labor Govt coming into power post GFC and blaming planners for product failures and all finsncial ills, with an agenda to promote their cash cow the ISA funds. Multimillions flow yearly from ISA – Unions – Labor. Research Shorten and Bowen’s background gen Y (if you were out of nappies then?) and there is a clear bias based on their prior roles and conflicts.
Assuming the world will be a better place once ‘those bad old products and bad older advisers leave’ is simplistic to the point of moronic.
A bottom feeder trying to pick up the scraps of the advice industry unhappy with the FPA position. Imagine if we put all the energy currently spent on bitching and moaning into our clients. Imagine where we’d be?
I’m not commenting on trails or commissions but I am floored at some advisers business model. The issue some advisers fail to appreciate is, that advice, to the mass market is over. It finished in 2013 when best interest obligations came out and the concept of a fiduciary relationship was introduced. Your AMP or Bank sponsored compliance training doesn’t cover as they are focused on FUM. You can’t have a client in a inferior investment product on the basis of you’ll be there to hold their hand for them when XYZ event occurs. Those days are over.
No use whining on about job losses and who are going to look after Australians. Treasury have clearly stated that they don’t care about job losses in Advice firms as a result of FoFA. It’s stated in hard ink. If you haven’t gone over your client base and worked out which of your investment clients you are seeing every year, year in and year out, and would happy to pay for this…then you’ve got a business selling Beta & VHS Cassettes still or you’re working at one of these petrol stations that run out and wash you windows. You’ll be able to hide out in your advice firms with multiple advisers and thousands of clients for not much longer.
With specific regard to grandfathered super trail only…. If you have not recommended your clients move from that product and be placed onto a fee for service alternative in a wholesale product you are an *insert expletive here*.
For Investment products sure CGT may be an issue, for Pensions, sure, grandfathered deductible may be an issue but for superannuation, give me a spell, you can’t justify or argue your way out of that one
Seriously? How about super owned insurances where the clients health prevents them from getting cover elsewhere? Do you also know CGT is payable in super? Buy/sell fees? Cost to the client of producing the SOA and implementing? Looks like it is you that is the *insert expletive here*.
Yes very aware of those issues. Point being you can still conduct a partial rollover . My point still stands and clearly you are a guilty party. Justify it to yourself however you want
Wow, you can avoid buy/sells and CGT if you do a partial. Good stuff.
Ignorant much?
I saw a client last year who was with Generations Super. Facts are when I took into account my ongoing fee instead of taking the commission she actually ended up in the same position and with CGT there was no point in her rolling out.
If the banks stop paying trails does that mean you can stop paying interest on loans to banks to buy an FP business? Is that a flying pig out the window?
Well done Peter – you just got those 2 things banned as well! 😆
Our grandfathered trail pays us between .3 and .4% revenue.
When we move that client into an non commission product they pay us 1%.
How is it in our interest to keep clients in these grandfathered commission products? It isnt. ASIC is participating in an adviser witch hunt, this is very very poor.
Maybe you could not charge the client the 1% when they move into the new product then?? Of course it is someone else’s fault that YOU choose to charge your client what you charge. Classic adviser behaviour.
Who are you to make this reply. You clearly do not run a business and wouldn’t know the practical steps of providing advice. Perhaps taking time to understand the process rather than taking pot shots is more appropriate
I understand plenty. If you charge volume based fees then you are a fee-gouging dinosaur and have no place in the industry. Of course it’s much easier sitting in the hammock and collecting the volume based fees and pretending that your client getting a monthly newsletter is ‘ongoing service’.
And, whilst we’re at it, what relevance does that 1% bear to the work involved? Do you do twice as much work to place $200,000 as you do to place $100,000??
Of course not. But we all know that commissions didn’t die – they just got rebadged as ‘adviser service fees’.
Aha, so if you have a client with $5mill, you charge them exactly the same as you do (upfront & ongoing) someone with $50k? Hahahaha, great business model there, bud! Guessing those bigger guys don’t frequent your office.
you can ask the same of real estate agents and lawyers.
Make the product provider purchase these trail clients from the adviser at the market rate.
Legislate that the provider then has to turn off the trail and rebate the fee to the client account. Also legislate a freeze on these product fees.
Clients will get reduced fees. Advisers can use the ‘sale’ to repay debt. Product providers will be the party paying for once, not advisers.
There is so much dirty strategy and manipulation going on here it is culpable.
There is an agenda first , second and third and it has nothing to do with client best interest but is everything to do with unfair retrospective legislative change, with institutional control, politics, unfairly proportioning blame onto advisers and philosophical opinions from righteous evangelists.
It is conflicted and manipulated overreach and it is a disgrace that retrospective legislation be suggested.
^ Found the adviser sitting on a large book of under-serviced, grandfathered commission clients.
You are an obvious troll on this industry website for finance professionals. Go find something else to do with your time as you know nothing about this subject.
^ Found another one. Truth hurts, doesn’t it?
^ Found a narrow minded ignoramus who can’t look beyond his own ideological beliefs to understand broader issues. Welcome to the rest of your life in a basic role of nothingness, with these types of comments. Guessing you are an employee wannabe or else mildly successful purist.
Instead of banning trail commissions & taking away the choice of clients surely it would be better to give clients the option?
Make all product providers who are currently paying trail to give their policy holders the option. Clients can opt out of paying trail but force their fees to be reduced by the amount of the trail. That way the public who do not value their adviser or the advice relationship have the choice to opt out without having to pay for new advice to change products. Those that see value in the adviser & don’t wish to change aren’t forced to.
Banning commissions removes the freedom of choice from those that are happy remaining as is.
Legislating the ban just lines the pockets of the product provider & only costs the client.
At this RC institutions have been shown to fail more than advisers. Yet the only policy suggestion from ASIC & FPA is to punish advisers & reward institutions. Looks like a clear agenda was decided prior to the commencement of the hearings.
Come on…. too much common sense…
Great idea, but you know consumers are unable to make decisions on their own (opt in), they require guidance from our highly educated (education is the cure for all ills re AMP debacle) and lofty leaders.
The issue here is old books that lock clients into legacy products that are not in their best interest. We have all seen clients on a trail that have never seen the so called adviser once they were signed up. How can this be in the clients best interest? the only person this benefits is the adviser. Remove trails and remove exit fees which are and have always been an absolute rip off. Stop crying over the change in the investment landscape, the old days are gone move on.
Your assumption that all clients that are paying trailing commissions do not have an adviser and are not receiving any service is wrong. Your ignorant comments are not helpful.
So why change , you already have a best interest duty under the current law .
If commissions are banned these things will happen for certain:
– There will be more admin staff in the unemployment line.
– Clients will pay more for service from advisers.
– Policy holders who only intermittently contact their advisers for assistance will be dumped on the scrapheap & left to the institutions to deal with.
– Clients who thought they had an adviser relationship will find out their product hasn’t changed, their fees haven’t been reduced but also that they no longer have an adviser relationship.
The calls to ban investment trail commissions – whilst well intentioned ignore the realities of financial advice to the mass market. Most financial planning business I’ve reviewed that have some history have the following profile. 80% of revenue comes from highly engaged, active FFS clients. 20% of revenue comes from ‘policy holders’ which form a long tail in the business. These are significantly smaller accounts,with policy holders who need advice intermittently & don’t typically have the capacity to pay when they need it. However advisers with this long tail also typically ‘look after’ these clients. Help them with death claims, withdrawals, simple contributions, age pension queries etc. This tail wont be converted to FFS clients because the cost to serve is higher than they can afford. These clients will be left adviserless, & if they want advice will be turned away . When the tail of revenuye goes – so does the service.
80/20 rule still applies today first thing found out joining the industry, well said! Sad thing is all these clients will be left to compare the pair but they will only compare their own pair
And who will explain the tax implications of redeeming funds, the Centrelink implications of switching funds, hold their hand during market volatility, apply for franking credit refunds, notify Centrelink of a change in their assets, assist the family when they die etc etc Raboadvice will create an algorithm and everything will be fine ???
completely agree the FSC is in this for themselves reduced grandfathering means reduced cost for banks and higher profits
People drive above the speed limit so then lets just ban all cars.
Alternatively you enforce the speed limit and penalise those that are speeding. Let FOFA and Best interest duty do its job, and come down heavy on anyone not following the laws.
Yes, best interests provides that AFSL’s must consider all factors. Grandfathered income of any form is not protected by grandfathering principle in terms of not advising a client that there is a cheaper alternative. It merely brought the practice of third party revenue channelling to a conclusion.
The current proposal is not being promoted so much by consumer advocates but rather by the insto’s who want to control the money flow and disadvantage parties who they now don’t like. Read into this past insto owned practices who have dared to go it alone.
It also provides a graceful exit for BOLR deals as you cant expect the deal wit remain the same if the income stream is not.
This is not a push for better deal for the consumer. It is a push for instos to keep more of the pie.
Sound familiar. It worked with risk commission rates, why not try the same trick again?