The Financial Planning Association (FPA) has reinforced its belief that grandfathered commissions on superannuation and investment advice should be phased out over a three-year period.
In a submission filed this week with the Productivity Commission, the FPA has reinforced its message that the Future of Financial Advice (FoFA) regime was started five years’ ago and “it is time to review the appropriateness of grandfathered commissions and identify a suitable means of transitioning these payments either to an alternative remuneration model or out of existence”.
However, the FPA said that commissions were often built into the fee structure of older products, and their removal might not directly benefit a client.
It also warned that consumers might not be impacted by exit fees on the product or there might be capital gains or Centrelink implications.
“Some legacy products only pay commissions,” the FPA submission said. “For commission-based products, not paying commissions does not necessarily reduce the cost to the consumer.”
It said there were also concerns about how grandfathered commissions could be switched off without generating other issues for the client (such as a CGT event or other income issues).
“For example, phasing out grandfathered commissions would mean clients would need to move to a new product. This would mean clients would lose the grandfathering of income test treatment, which may result in a loss of social security benefits,” it said.
The FPA suggested that one solution worth investigating was that product fees could be required to be reduced by an amount equivalent to the commission so that the client continued to receive the same benefit as would occur if they were able to switch off the commissions from going to an adviser or the product manufacturer.
“An alternative would be for the product provider to return the commission via the issue of new units (perhaps in a fund of the client’s choice if they don’t want to add to their legacy product),” it said.
“We also suggest that grandfathered Centrelink pensions be given an exemption from losing their special concessions if they have to be rolled over as a result of the cancelling of the grandfathered commissions and any changes this may have to the product.”
