The Association of Financial Advisers has warned of the impact on younger financial advisers should the government proceed with the banning of grandfathered revenue.
In a submission to Treasury, AFA chief executive Philip Kewin noted the many advisers who have recently acquired books of grandfathered commission clients as part of an initiative to build their business.
He said this had become a common strategy for younger advisers and often encouraged by their licensee or a related party.
“For these younger advisers, it was an opportunity to acquire a book of clients that they could then work with and, over time, transition to a fee-for-service arrangement,” Mr Kewin said.
“Quite often these younger advisers borrowed money in order to acquire these businesses and have large business debts that they need to service.”
Mr Kewin also pointed out that advisers often use a combination of business assets and personal assets, such as family homes, as security for business loans, and that loans are typically arranged on a maximum loan to value ratio, with grandfathered commissions attracting a multiplier of between 2.5 and 3.5 times recurring income.
That considered, Mr Kewin said the removal of any value attributed to these grandfathered commission clients will place these businesses at risk of exceeding the maximum permissible loan to value ratio and there being non-compliant with their loan agreement.
“The impact of this is very real and unless the banks are prepared to show some discretion, it is very likely that we will see a sizeable number of businesses both in distress and failing,” he said.
“With the declining value of financial adviser businesses this will also put the homes of a number of advisers at risk.”
Should the government proceed with banning grandfathered commissions, Mr Kewin recommended that it be done by settlement between product providers and licensees.
He said any legislation should be based upon a three-year transition period from the date that the legislation is passed.
Further, Mr Kewin said consideration should also be given to exempting some legacy products, such as lifetime annuities, endowment policies and whole-of-life policies where there is no practical solution for rebating the banned grandfathered commissions.
In addition, he called on the government to provide Capital Gains Tax roll-over relief and Centrelink roll-over relief to enable impacted clients to move from legacy uncompetitive products to competitive products.
Lastly, Mr Kewin said exemption should also be made available to clients who would be disadvantaged by being moved to another product, and who can elect to continue to be in grandfathered commission products and for their advisers to continue to be remunerated.
“This might be on the basis of a facility to allow the clients to direct the payment of the rebate to their adviser,” he said.
Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.
You can contact him on [email protected].
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