Financial advisers will need to make sure their fee charging systems for clients in a fixed-term agreements do not perpetuate fees charging over 12 months, a lawyer has warned.
Herbert Smith Freehills partner, Michael Vrisakis, told Money Management that given the stringent compliance requirements for ongoing fee arrangements, many advisers who found it difficult to meet those requirements had decided to adopt the KIS principle and entered into arrangements of 12 months or less.
“The reality is that many licensees and advisers are choosing to service clients through a period of 12 months or less,” Vrisakis said.
“The really important issue is to make sure that the fee charging systems do not perpetuate fee charging over more than 12 months and that this is incorporated into the arrangement with the client so that they don’t pay fees for longer than the 12 months period.
“But if this can be achieved, the NOFA – the Non-Ongoing Fee Arrangement – is a good and legally valid alternative.”
On Tuesday, the Australian Securities and Investments Commission (ASIC) released guidance surrounding ongoing fee arrangements and clarified what was and what was not an ongoing fee arrangement.
“An ongoing fee arrangement exists when:
- The fee recipient gives personal advice to a retail client (‘client’)
- The fee recipient and client enter into an arrangement, and
- Under the terms of the arrangement, the client must pay the fee recipient a fee (however described or structured) during a period of more than 12 months: see section 962A.
The following examples are not ongoing fee arrangements:
- A payment plan meeting the requirements in section 962A(3), and
- An arrangement under which the only fee payable is:
- An insurance premium (see section 962A(4)), or
- A product fee (see section 962A(5)).”
- However, ASIC noted that licensees and advisers “frequently” entered into fixed-term agreements where they changed clients for a period of 12 months or less.
“There are a range of factors that ASIC will consider in determining whether or not such an agreement is an ongoing fee arrangement. In addition to the terms of the written agreement, these factors include but are not limited to:
- Whether the agreement is limited to a fixed-term period of 12 months or less;
- Whether fees stop being charged at the end of the fixed-term period and do not exceed 12 months – for example, because the adviser or licensee has back-office or administrative systems in place to turn off the fees by the end of the fixed-term period; and
- Whether there is an understanding between the client and the adviser or licensee that the client will be charged for a period of 12 months or less. This can be demonstrated by information given to the client, including brochures and marketing material, and a general record of discussions with the client,” ASIC said.