Ending grandfathered trails will enrich banks, not clients

15 January 2019

The Productivity Commission (PC) and other elements calling for an immediate end to grandfathered trailing commissions need to understand that banks and other product manufacturers may be the ultimate beneficiaries rather than financial planning clients, according to Association of Financial Advisers (AFA) chief executive, Phil Kewin.

Kewin also pointed to the reality that a market had been created for books of trails which could see some planners facing substantial commercial losses in the event that a future Government moved in line with the PC’s recommendations to immediately end the grandfathered arrangements.

He said the AFA was firmly opposed to fee for no service in the context of grandfathered trailing commissions and firmly believed that financial advisers who acquired books of trails should be actually servicing those clients.

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However, he said that advisers who had purchased books of trails, sometimes financed by the financial institutions for which they worked, had done so in good faith and consistent with the law as it existed at the time.

Kewin said that it was in these circumstances that there should be no unilateral decision by Government to end grandfathered trails but, rather, a fully informed debate.

“The writing may be on the wall for grandfathered commissions, but there is a need for discussion and debate about the consequences not only for advisers but for clients,” he said.

“The reality is that ending the trails will not necessarily result in the money going to clients, it may very likely end up being taken by the financial institutions,” Kewin said.

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Yes, it is happening now, & started in 2014. They will end up discovering it will be a massive mistake, eventually. Their competition will hide their admin support with their investment fee component & the advisers who need to pay all their ongoing regulatory, new education and FOFA operating costs will have no choice but to take their clientele elsewhere.

Surprise surprise. Already happening and happened before.

As an Industry (i.e., all staff) we should work together to create a voting block at the next election. As an industry this would cause politicians to think twice. Look what happened at the Division of Wentworth. It we vote for independents, no major party would control the house.

Need any proof. Ask clients if they have benefited from insurance commissions being reduced. Not one insurer has reduced premiums even though what advisers received has been dramatically reduced, in fact premiums have been increased significantly. The advisers are worse off, the clients are worse off, yet the insurers/banks have all had a win. The argument that clients will be better off if grandfathered commissions are banned is simply untrue. Yet the government, ASIC, and Choice etc will all pat themselves on the back when the commissions are turned off, and behind the scenes the banks will be laughing because they know that again they have pulled the wool over everyone's eyes.

This is why so many advisers are joining the Financial Services Union. The AFA are doing a good job, but the other industry bodies have been captured.

when the business moves up the road, away from the big banks, let's see who has the last laugh then.

Perhaps the Government could buy the trails back from the Advisors. this happens in other industries, when the Government changes the laws and it affects businesses.....

FOFA determined a line in the sand and grandfathered commissions on existing business were allowed to remain in place under law. The basis of allowing the retention of these legislated payments was to not to deliberately disrupt the structure of business for existing clients which may be detrimental and disadvantageous and to allow the eventual and progressive transition to a new regime over time whilst still allowing advisers to receive remuneration for services and advice provided to those clients.
If the Govt were to proceed with a mandatory cessation of these legislative payments, it may be deemed a deliberate acquisition of property or the removal of the right to receive these payments.
As such, it may be deemed that fair compensation be paid for the deliberate removal of the rights to that property or continued payments.
The arrangements offered must be fair or such that legislature could reasonably regard them as fair.
Interestingly, the judgement of fairness must take account of all the interests affected, not just those of the dispossessed owner. So, if a client's interests are also affected detrimentally, there may also be a case to argue that they also be included in fair compensation.
If a change in legislation resulted in the adviser no longer being able to receive the grandfathered commission payments and the product provider retained those commissions, the change in law would be effectively dispossessing one party and allowing a second party to retain the dispossessed party's remuneration.
The recommendation of the Productivity Commission and all the self interest groups that are calling for adviser's blood are not based on logic and thought, but based on their ideology and opposition to the term "commission".
The mandatory removal of payments that advisers currently have a legal right to receive and retain will be entirely detrimental to clients who receive advice and service often for a much lower cost base than the alternative and remove large portions of business value that advisers have either purchased in good faith and/or built up over many years.
If this were to occur, then it is only fair and reasonable that fair compensation is forthcoming based on the deliberate change in legislation.
The grandfathered commissions should be left to run their course over time and they will eventually phase out naturally as advisers transition clients based on their best interest duty obligation.

Interesting comments - thank you

Many years ago trails were a means of ensuring that Advisers were incentivized to stay in touch with investors/clients with the institutions. The money was paid out of the Funds of the Institutions; not out of investors/clients accounts. These trails still in existence still serve the purpose they were designed for; SAVE THE INSTITUTIONS from having to phone their investors/clients at least every year and rely on the Advisers to spend their time doing this necessary chore. Both the institutions and Advisers gained NEW BUSINESS through this system. Even some instances would arise where the particular investment would no longer be appropriate and should be shut down entirely or replaced by a better product.
By not paying trails the Institutions will keep the money, and advisers and institutions will no longer be incentivised to keep in touch with investors/clients. Yes, the Insttituions will save money but will lose NEW BUSINESS!!!! The investors /clients will not be better off financially but WORSE OFF because they will find that no one continues to talk to them to examine their new or changed needs.
Only a certain breed of person would want trails to stop and that breed are not interested in the BEST INTERESTS of the Investors/clients, simply a POLITICAL AGENDA aimed at wrecking our Industry!.

What happens if the grandfathered commission payment built into the product pricing model is retained by the product provider, not passed back to the client and the adviser then has to charge a fee for service in order to provide the client with ongoing advice?
This would immediately result in the client being disadvantaged from a cost perspective.
This would mean the change in legislation would be immediately acting against the client's best interest.
If a change in legislation were to disadvantage a client or increase their costs, the body instigating the change would be negligent in it's duties.
It is not up to the Govt to determine if a sweeping change in legislation would benefit every client in the country as they have no measure by which to make that determination.
How would the Govt instill measures by which to monitor whether every single product provider across every single pre-FOFA product is passing on any cost saving associated with the removal of grandfathered commission payments?
This must be determined by advisers who are governed by the best interest duty and can assess a clients individual needs and circumstances and whether a transition from a pre-FOFA product to a post-FOFA product is going to be of benefit to the client.

At least Trails paid by Institutions are known by at least the above 6 commentators to be important and a satisfactory way of compensating advisers who regularly contact clients invested in products which generate trails. There is nothing wrong with this system providing the compensation is declared and we all do that! At present as Agent 86 and I point out the CLIENTS will be the losers because we will simply institute a new direct charge to maintain our concern and interest in the welfare of our clients. So, ideally, if advisers continue to service clients, institutions will be better off financially, advisers will continue to be compensated, and the clients will be out of pocket!
All the result of the campaign against "Commissions'.
Let the almighty help those Members of Industry Funds who get no service, are put willy-nilly into Funds (perhaps as a SECRET deal between an employer and a Union) and then into asset allocations, without any education. And then the Members suffer from fictional quoted returns (e.g. Property valued occasionally, alternatives valued how?). Never forget the MTAA and their brush with the unmentionable, or the TWU. 2014 TWU Royal Commission evidence of NON DISCLOSURES, "Mr Stoljar told the hearing the fund was paying the TWU approximately $200,000 a year in directors' fees and a further $500,000 in reimbursements for salaries and expenses of numerous superannuation liaison officers employed by the TWU.
It also spent a further $100,000 in sponsorship.
Further, four of the nine directors were among the most senior officials of the TWU, including Michael Kaine, who headed the TWU's EBA negotiating team and was an alternate director of the super fund."

It seems that some of the smaller investors are becoming serial pests, requesting high levels of service, for free. Some of these investors are going to be in for a BIG surprise when they will be told to join the waiting list or asked to go elsewhere. This has started already. So all these smart-arsed journalists & book floggers who are revving up these small investors against advisers might find they will become the next target, when their readers discover they are going to denied advice, as they days of low fee advice is quickly coming to an end, due to the steady removal of grandfathering. Advisers now have massive regulatory, education & liability responsibilities, and our patience is quickly running out.

That's cool but you better do the same for intra fund advice.

We as advisers should start changing the name of ongoing advice to ongoing intra fund advice and deliever the same service without consumer protections and it will be game on.

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