AFA urges opt-in on grandfathering

The Association of Financial Advisers (AFA) has called for a three-year transition to the removal of grandfathering with consumers given the right to opt-in to existing arrangements. 

In a submission filed with the Treasury, the AFA has also callled for key exemptions for some products such as lifetime annuities and whole of life products. 

It has also warned that banks are already telling financial advice lending clients that they are placing no value on grandfathered commission clients. 

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However, the key to the AFA submission is that clients should have the option to opt-in, in order to continue a grandfathered commission arrangement where they can continue to access financial advice. 

It has also urged that the Government provide capital gains tax (CGT) rollover relief and Centrelink rollover relief as result of any removal of grandfathering. 

The AFA submission said that with respect to the future of grandfathering, there had been “no genuine debate on grandfathered commissions and no apparent appetite to understand the implications of this proposal”. 

“This has been a highly political matter that has meant that genuine consideration of the implications has not occurred,” it said. 

“We have taken a number of steps to try and ensure that there is a comprehensive analysis of the issue, however in many ways we have been discouraged from speaking up.” 

The submission said the Royal Commission recommendation around granfathering and the response of the political parties had already “had a very material impact upon the financial advice sector”. 

“We are aware of some banks who are already telling their financial advice lending clients that they are placing no value on grandfathered commission clients,” it said. “The outcome in this change of business valuation methodology is that it may put a material number of financial advice businesses in breach of their loan to value ratio obligations and therefore put their loan in default. This is happening even before the law has been passed.” 

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Opt-in for grandfathering...?#! How many of those whole of life and annuity clients are being actively reviewed by their adviser? Please... Community expectations have already moved on from here and the AFA should keep their powder dry for the insurance commissions debate.

"How many of those whole of life and annuity clients are being actively reviewed by their adviser?" That's.... kind of the point of the article, isn't it? If they are in fact receiving ongoing advice and service on these products, then they should be given the option to opt in to grandfather and retain the commission arrangements, lest they be charged extra direct fees for service outside of the product.

What gives you the right to decide what community expectations are Bob? You are one person , not the community. If you actually asked real life clients if they minded the adviser getting the commission most would say they dont. If they did its simple to take an adviser off an account , clients know this. You also confuse grandfathered commission on super and a fee for service. These commission payments were built into products and disclosed in soas...there was never a csa signed. So put that in your pipe and smoke it Bob.

I agree with Bob, stop arguing for grandfathered commissions and move on. Unless clients were stuck in legacy products with CGT or exit fee issues they should have been moved to a fee for service arrangement years ago. The argument about asking the client what they want is ridiculous, nearly all clients will say they are happy with their Adviser and don't care if they are receiving a commission because they like the person and don't know what the alternatives are. They would also have no idea that they can shift the account/policy to another Adviser.

Most product providers will allow you to rebate the trail and then charge your adviser service fee, without the need to even change product. The only reason Advisers haven't done this and have hung on to the trail is to avoid shifting those clients into the FDS/Opt In regime, in other words, laziness, and a fear that once they have to tell the client what they are charging them and itemise what they're getting in return, they'll lose the client.

Well Bob, "How many of those whole of life and annuity clients are being actively reviewed by their adviser".
How many member clients are being served under Intra fund advice - it is charged to every single one of they with no option to remove.
Do you have the same view - should it not be opt in as well at minimum?

Most grandfathered commissions are paid by the product provider and NOT out of the client's account.

The point is that doing away with Grandfathered Commissions will add to the PROFITS of the Product suppliers and will not affect clients one iota. YES HAYNE AND HIS QC and SC Assistants had the welfare of the big boys at heart and not the poor hard done by ADVISERS!!!!!!

Scotson, the product providers collect the commission and pay it to the Adviser but they are not paying it out of their own pockets. The trail is bundled into the MER of the investment option, hidden, so that the client never sees it as a transaction but ultimately it's being paid out of the client's balance. They receive a lower net return on their investment as a result. If the trail is turned off or rebated then the client will receive either a lower MER, resulting in a higher return, or a credit on their account, shown as extra units being purchased.

The more the AFA and the FPA try to argue for better terms for Advisers with big books or trails the worse we all look and our bargaining power is further diminished for future lobbying.

They should focus on providing guidance and tools to the Advisers most affected to help them shift their clients to fee arrangements and get started on lobbying for the retention of risk commissions at the 60/20 level.

If the trail commission is removed lowering the MER and an ASF is established for exactly the same level of remuneration in order to replace the trail commission and the ASF is paid from the client account, explain exactly how the client is better off.
If the trail commission was .44%p.a. and the ASF was .44% p.a. where is the financial benefit.
Don't start explaining details around transparency of fees etc because that could very easily be rectified by disclosure of the commission component of the total MER anyway.
Just explain exactly what financial gain the client will experience in relation to the above example.

The argument is not entirely about the financial gain, it's about our reputation as Advisers and trying to transition to a profession rather than salespeople. If you think that Advisers with decent numbers of clients in these products are in fact providing a meaningful level of service then you're kidding yourself. AMP and the banks are up for billions in remediation for charging fees and not providing the service, what do you think Advisers are doing when they have no obligation to provide any service....nothing. Maybe a newsletter here and there.

What about if the client makes the decision they don't want an Adviser attached to their account. If there's no Adviser to rebate the trail then they pay it and the product provider keeps it for themself.

It's about getting the clients into products that are modern, flexible and provide the client with options. These old products don't do that.

In your comment above, if there is no difference between the remuneration being received by the Adviser then why not shift them to a fee for service arrangement and potentially a more modern product. The client is happy because they know what they're paying, how they're paying for it and what they get in return.

I really can't believe people are arguing the case for what are essentially hidden payments in return for doing nothing.

Brett, you really cant believe it, because your mindset, ideology and how you see yourself in the world doesn't allow it.
What you are saying here is that if an adviser is being remunerated via commission payment they are not professional.
It appears you believe the way you are remunerated determines whether or not you are professional in your advice and service to the client.
There are many unprofessional advisers who are remunerated by a Fee for Service only model.
There is an attraction to a percentage of these who will deliberately over service the client in order to charge additional fees, often for alterations or changes that from the clients perspective may appear to be adding value or service , but in reality do nothing at all for the clients benefit.
If the commission component of the total MER was disclosed in percentage and dollar terms on the client's statement, firstly they wouldn't be hidden and secondly, there may be no financial advantage moving the client at all.
The generalised comment that old products don't satisfy the needs of clients is simplistic.
I know you may not accept this, but some clients are satisfied with 30 quality investment options and not 300.

I'm not saying all commissions are bad, I take commission on life insurance advice as I believe it provides the right balance of adviser remuneration and affordability for the client.

Surely it's more professional to sit down with a client, explain your services and have them explicitly agree to pay your cited fee in return for those services. Not just start disclosing a commission that the client probably never knew you were receiving and say "well now they know about it, it's all good". What rubbish.

The types of products we're talking about that still have grandfathered commissions are AMP Flexible Lifetime Super, MLC Masterkey (one of the many varieties), Asgard, Mentor (ex PIS) etc. All of those products compare horribly when they are put next to an industry fund or one of the better wholesale funds / platforms.

Even the product providers themselves recognise how dated they are and have developed replacement products that provide essentially the same thing but with no commission option and lower fees to the client. AMP Flexible Super instead of Flexible Lifetime Super, MLC Masterkey Fundamentals instead of Masterkey Gold Star, FirstChoice Wholesale instead of Retail....why do you think they've done that....because the old products can't compete, are outdated and are not in the best interest of the clients.

This is the problem with our industry and the reason the new education standards are going to provide a really positive clean out. The industry needs to move forward not try to hang on to the past.

Thank you Brett for imparting this wisdom. In my case I receive some commissions provided by one product provider on the ancient accounts of clients and all clients accounts are NOT debited. But if you really believe that the product provider will adjust the mer after all these years, then you must have more faith in the generosity of the provider than I. He has no obligation under the PDS!
One client closed his account recently and you cannot imagine the numbers of calls I got on a daily basis from the preservation staff at the provider asking (demanding) that I get the client to change his mind, and pointing out to me that I would lose commission and that I was being paid that commission to preserve the account.
Guess what? The client wanted the money to pay for palliative care and soon died after receiving the money!.

Scotson you just proved my point - the client accounts are not debited, meaning a transaction does not show up on their statement quoting "Adviser Trailing Commission $". It's hidden from the client, but they are still paying it. In my experience they don't adjust the MER, they rebate the commission amount by purchasing extra units on behalf of the client.

Agreed. Very important to have this discussion. AFA is doing to right thing here and speaking up.
As a number of pre2013 clients are already receiving annual Fee Disclosure Statements in any case as their old commissions structure was dialed up above the base fee already, it would make a lot of sence to issue opt-in and give the client the choice to carry on - without issues of tax and centerlink triggers etc as well.
Well done AFA

The unintended consequences of the push to remove grandfathered remuneration simply because it is politically popular or because the Govt is under political pressure to adhere to Hayne's recommendations is negligent and irresponsible.
It is based on ideology and not factual analysis of the specific costs, advantages or disadvantages to a client's position.
As we speak advisers and their clients are receiving communications from product providers very obviously encouraging clients to turn off trail commission payments to which the adviser currently has a legal right to receive
as payment for the provision of service and advice.
The product providers are immediately dictating terms prior to any legislative change and using the excuse that their Trustees are under an obligation to act in the best interest of their super members.
They are using this reason to obviously "encourage " members to turn off the trail commission prior to any possible alteration of the law.
It would be assumed that every licensee would have to have a signed distribution agreement with every product provider they allow their AR's to recommend and it would be assumed those agreements would refer to the payment of the trail commissions under current law.
As those product providers are right now contacting clients and suggesting or encouraging they ask for the commissions to be cancelled or rebated, it may be considered a breach of the agreement between the licensee and the product provider.
Secondly, whilst these product providers are either obviously or subliminally encouraging clients to turn off trail commissions, they are also suggesting that before they do so they seek the advice from their adviser in respect to matters such as the impact of potential tax consequences, existing insurance arrangements, fees and charges and possible Centrelink benefit impact.
So, before an adviser could provide an analysis of a clients position and determine whether or not it is in their best interest to transition away from an existing product, a full cost benefit analysis must be completed in addition to the completion and update of a clients financial position and needs/objectives, the completion of a full SOA as it is new advice and most likely at least 2 client meetings to discuss options, followed by implementation if proceeding.
Lets say the annual cost saving just in fees alone transitioning from older product to newer product is $500 p.a.
The adviser needs to spend a total of 6-8 hours analysing the options and producing the compliance documentation in order to justify the transition or recommendations.
The adviser issues an invoice to their client for $2500.00 to cover the cost of this process.
The client was going to save $500 per annum in product fees and the adviser advice and compliance cost equates to 5 years of product fee reduction.
Or should the adviser simply provide the meetings and discussions, analysis and comparisons, documentation and implementation process for nothing or should the annual trail commission of say $500 be the only payment the adviser should receive for 6-8 hours of additional work on top of other advice and service issued throughout the year for which the trail commission has already provided payment for ??????
This IS the reality of the real world ,NOT the ideology on which this whole misguided and uninformed recommendation has been based upon.
The product providers don't have any concern for this process as they are not giving advice...or are they ?
If the communication from the product provider infers that a client should at least consider transferring product to another contemporary product provided by that very same company, is that considered leading advice or encouragement to act ?
Although they cover themselves by stating the client should seek advice first, if the client elects not to do so and accepts that the very suggestion of transferring product may benefit them, is the subliminal encouragement to change
considered to be seeking to influence ?
This is a very, very dangerous position for these product providers to be playing in at present.
They are taking matters into their own hands before any legislative change has occurred and may be in breach of distribution agreements.

A breach of the distribution agreement, money misappropriated from Advisers through this breach, and more money for the Product providers and not a single dollar to the clients. Is this verging on criminality???? But it will do wonders to the product provider's bottom line! So the clients DO NOT BENEFIT!!!! So what is the point of this in relation to older clients.
AFA and some commentators miss the point in this. Opt In if exercised as an OPT-OUT will not benefit the clients because we are not discussing the clients monies under management but the money paid to Advisers by Product providers out of their Funds to remind advisers to frequently review clients' affairs..

Well said agent 86 and good on to the AFA for going to bat for the industry with a workable option that would benefit both clients & dare I say it advisers. Yes I am an adviser that does receive a portion of my income from grandfathered payments. Since 1995 I have included in reports issued to clients a disclosure of what I expected to receive in both percentage & dollar terms from a clients investment. I have no problem with an opt-in arrangement going forward. Many clients themselves appreciate the fact that they do not have to worry about setting moneys aside to pay there planner. How many of your clients have raised their concerns about the ever increasing costs of living and how difficult they are finding it keep money in the bank to pay electricity, phone gas rates rego etc. etc.

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