FPA plots new course on fees and commissions

The Financial Planning Association (FPA) has taken the outcome of the fees debate into its own hands by recommending a move away from commission payment by 2012 via transition to a fee-for-service or direct charge model.

The FPA has issued a groundbreaking consultation paper in which it says it wants its members to align remuneration with the financial advice provided, as distinct from the cost to implement an investment strategy through the use of financial products.

This is a substantial shift in policy in an industry whose lifeblood has traditionally been the payment of commissions from product providers to financial planners. However, the consultation paper draws a line in the sand with respect to legacy products and has suggested the arrangements apply to new advice, with a grandfathering arrangement for products relating to previous advice.

“Some practices in the remuneration field that are historic are no longer appropriate nor are they sustainable going forward,” the FPA’s consultation paper said.

The consultation paper issued by the association said “remuneration continues to dominate the policy agenda”, largely as a result “of a number of high profile corporate collapses where high upfront commissions were evident, and also because of competition in the superannuation sector between retail and industry superannuation funds”.

The consultation paper said “the issue of remuneration is often cited as a key issue of conflict in the profession”, and the FPA wants to ensure “strong guiding principles” are in place.

The FPA said despite the convenience and tax benefits of a commission payment model, the cost and value of the advice given is not necessarily understood by clients.

The association is recommending its members adhere to six new ‘principles’ relating to remuneration. Probably the most significant is that consumers, rather than product providers, pay for financial planning services. Also important is the move to present fees that are separated between advice and product, and that fees can be ‘switched’ off if no ongoing advice is being provided. This is a significant shift from the current environment, in which fees only cease being paid from product providers to financial planners when a client withdraws their funds or when a life insurance policy is ended.

The FPA said that where ongoing charges apply, these may be made through regular deductions from a client’s account. Loading an upfront payment will not be permitted.

“This approach to planner remuneration is designed to reduce the potential for [product] providers to influence planners’ remuneration,” the paper states.

The remaining principles are that consumers must be able to understand and compare the fees they are paying, while fees must also be ‘true to label’.

The FPA is proposing that by July 1, 2012, all new advice, services and products will be delivered using charging structures that satisfy the principles and that are negotiated between the financial planner and the client.

In announcing the move, FPA chief executive Jo-Anne Bloch said the association had been examining the issue of remuneration for many months and that it was a decision that was “not taken lightly”.