Legacy products cloud FOFA reforms

The legislative changes evolving from the Future of Financial Advice (FOFA) reforms may force the Federal Government to finally move on the tax treatment of legacy financial services products.

The need for the Government to finally address the issue of legacy products has been brought to light by the implications of the proposed opt-in arrangements, which open up the possibility of consumers being inadvertently exposed to tax liabilities if they choose to ‘switch off’ some legacy products.

The Government is also faced with the need to clearly define the status of trailing commissions with respect to opt-in arrangements.

While some industry spokesmen believe that legacy trailing commissions will be left undisturbed by the FOFA changes, others believe there is a need for clarity concerning their status and the consequent tax fallout in the event that such arrangements are disturbed as a result of the opt in process.

Former Financial Planning Association (FPA) chair and principal of Berry Financial Services, Julie Berry, said that while a consumer might opt out of a product generating a trailing commission, that would not of itself switch the trail off — it would simply change where the trail went.

“There is also the possibility that such an action might generate capital gains tax (CGT) exposures,” she said.

For her part, Berry believes the FOFA changes have already created a need for financial planners to alter their business models and the manner in which they value their businesses.

She said she believed that the key issue would be how businesses would be valued in the context of a fee-for-service world and the absence of recurring revenue in the form of trails.

Berry suggested that it was likely that businesses would be valued on the basis of earnings before interest and tax (EBIT) — in a similar fashion to accountancy practices.

She said a series of financial planner focus groups this month had suggested they expected a change in the way in which businesses were valued and this, in turn, was likely to impact the sales of such businesses.

Count Financial chief executive Andrew Gale said he believed that the valuation of financial planning businesses should always be related to fees rather than valuation based on multiples.

However, he noted that it was also important in making such valuations that factors such as compliance, licensing and client retention were taken into account.

Gale pointed out that whatever changes the FOFA reforms might deliver needed to be weighed in terms of when they would ultimately affect the industry. If the changes are ultimately implemented in 2012 then it might be 2014 before the planning industry witnesses the first impacts of the proposed opt-in arrangements.