Time for financial planners to let go of trailing commissions

Putting aside the increasingly open question of whether the Gillard Labor Government will remain in power long enough to oversee the implementation of its Future of Financial Advice (FOFA) legislation, the financial planning industry must accept that, grandfathered or not, trailing commissions are inappropriate.

Notwithstanding the seemingly buoyant demand for books of C and D clients, there exists a bipartisan acceptance in Canberra that passive income earned from clients who planners have not seen in years and with whom they have not seriously sought to make contact is no longer acceptable or sustainable.

What those who hold large books of C and D clients also need to understand is that, irrespective of grandfathering and the level of revenue they are collecting from trails, they are indulging in a game of ever-diminishing returns.

If the industry superannuation funds are to follow their long-established pattern, then financial planners can expect an advertising campaign specifically aimed at encouraging C and D clients to examine their circumstances and switch off trailing commissions by obtaining “more appropriate” advice elsewhere.

Financial planning business brokerage Radar Results last week reflected upon the fact the $11 opt-in quoted by the Assistant Treasurer, Bill Shorten, and derived from Industry Super Network-commissioned research undertaken by Rice Warner fell well short of the reality.

However, in doing so, Radar cited research revealing “that each of the 71 financial planning practices selling today contains, on average, 544 clients”. It added, “when you further analyse the figures, these practices can have up to five times more inactive clients than active”.

In other words, the Radar results research suggested that, on average, the financial planning practices it was seeking to sell had around 108 active clients, with the remainder being inactive.

This sort of data only strengthens the hand of the industry funds in prosecuting their campaign supporting onerous opt-in arrangements, because it can be extrapolated to suggest financial planners are really actively servicing only about one-fifth of their clients.

What needs to be understood about the Government’s approach to opt-in, is that it has always represented a proxy for the more difficult task of ending trailing commissions. Sadly, opt-in looks certain to impose an undue cost on many planners who have no great exposures to trails.

With the grandfathering provisions in place on trailing commissions and with the costs involved in contacting long-inactive clients being considerable, there is little incentive for planners with big books of trails to unduly exert themselves.

With this being the case, financial planners must expect their detractors will continue to attack them, irrespective of the broader reality.