InFocus: How an end to grandfathering brings an end to adviser subsidies

The degree to which subsidies have been removed from the financial advice industry and the consequent impact on the relationship between advisers and their dealer groups has been starkly revealed in the half-year results released by publicly-listed, CountPlus.

And the reason it has been revealed is that the company has had to explain to shareholders what flowed from last year’s acquisition of Count Financial from the Commonwealth Bank in circumstances where Count Financial advisers were working in what can be described as a heavily-subsidised environment.

The bottom line for CountPlus was its acquisition of Count Financial only made commercial sense if the subsidies were removed.

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As pointed out by CountPlus chief executive, Matthew Rowe, Count Financial historically charged relatively low fees to members for the provision of services, subsidised software and professional indemnity expenses “and received large grandfathered commissions and product platform rebates which are ultimately paid by clients of Count Financial advisers”.

In a letter to shareholders, Rowe explained that, in total, approximately 60% of Count Financial’s revenue related to grandfathered revenue arrangement and he said those arrangements would likely cease from January, next year.

“Colonial First State announced that it was ending grandfathered revenue arrangements early, which means approximately $1.5 million of grandfathered revenue payable to Count Financial will be redirected to clients in July, 2020 and we must prepare for others bringing forward their plans,” the letter said.

“To mitigate the impact of the changes to these grandfathered arrangements we are well-advanced in our plans to have our new pricing model embedded by 1 July, 2020.”
Rationalising the need to impose a more pragmatic pricing model on Count Financial advisers, Rowe said that, in recent years, the company had not been profitable.

“Count Financial has subsidised member firm software costs, professional indemnity insurance and the total cost to serve based on grandfathered revenue received from product manufacturers.

“Some of these subsidies were removed on 1 December, 2019 as the first step toward a user pays model. The impact of working with firms to adjust to this first stage of the new pricing model was unrecovered expenses from 1 October to 1 December, 2019 of $859,000 which were expected as a transition cost,” the letter said.

Rowe noted that a market shift had occurred as around 58% of advisers were now authorised by privately-owned licensees with 50% growth in the number of licensees having occurred in the last five years.

“There appear to be some players in this space competing on a low cost/compliance model. Whilst we do not believe these business models are sustainable or provide adequate client protection, the economics in the advice space are stressed and these players look – on the surface – to be attractive to some advisers.”

Rowe said there was a significant change process underway as Count Financial began to provide tools to its advisers to identify where revenue would be redirect to their clients that was previously subsidising the costs to serve their firm.

“Count Financial has been late to the market in addressing the user pays trend in advice businesses. Key to bringing our advisers on this change journey will be open communication and collaboration with our advisers, various calculators and tools to assist them in building a ‘new world’ value proposition that is sustainable for clients, firms and Count Financial.

“Significant challenges come into play in the 2021 financial year as we move away from grandfathered revenue, reposition our business model and face the risk of falling adviser numbers due to regulatory change,” the letter said.  

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There's going to be people saying that the end of grandfathering will mean that some people will not be able to afford financial advice under a user pays system. But the user pays system will demonstrate the real value of independent financial advisors and that their services do cost to provide and these costs are necessary for quality financial advice.

I fear that the new SOA requirements, etc are more costly than the value of the added red tape for regulatory compliance and thus driving up those costs and therefore the prices that will have to be charged to be in business of financial advice.

for once Hedware your comment actually makes sense.

The very people most of these rules have been brought in to protect will no longer be able to afford advice. Well done all concerned. Great outcome. And this is just the beginning of the advice downfall as the practising adviser numbers continue to plummet year on year.

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