ASIC: Trails equate to ongoing fees

While the Association of Financial Advisers (AFA) has argued that grandfathered trail commissions do not equate to ongoing service arrangements, the Australian Securities and Investments Commission (ASIC) has argued that they do.

ASIC has used its submission responding to the first-round financial advice hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry to describe ongoing service fees as having “some similarities to commissions, in that they are recurring, are practically ‘invisible’ to the customer and may bear no relation to the work actually done”.

“In ASIC’s view, it is plausible that a continuing culture among licensees and advisers of receiving  ongoing commissions which bear no direct relationship to the provision by them of service to the customer (a culture condoned to at least some extent by the grandfathering of commissions) may have contributed to those licensees and advisers paying insufficient regard to the need to charge ongoing service fees only where the service was provided,” the submission said.

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On the question of whether the grandfathered arrangements should cease, ASIC said any exception to the ban on conflicted remuneration had the ability to create misaligned incentives which could lead to inappropriate advice.

Further, the regulator pointed out that it had always been opposed to the grandfathering arrangements under the Future of Financial Advice (FoFA) changes being allowed to continue in perpetuity.

It said that ASIC was concerned that almost five years after the implementation of the FoFA reforms, grandfathered commissions continued to form a significant proportion of licensee/adviser remuneration and that grandfathered commissions “operate to incentivise advisers to keep clients in legacy products with a continuing commission structure, even where there may be better products available to meet the client’s needs”.

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A lot of ASIC's problems concern a lack of resources - but this is another matter - when FOFA was brought in I do not recall any debate about grandfathering of commissions - the position taken was that existing commercial arrangement should not be interfered with - rather than leading debate ASIC is responding to it - if grandfathered commissions are such a bad thing it is not apparent why ASIC has not raised any issue about then until now.

I think it would be fair to now say that advisers receiving trail have X amount of time to transition these clients to fee for advice or turn off the trail. The damage that these legacy products do to clients is beyond belief.

Jason, interesting argument. I see your proposition as being not unlike the argument for Governments to appropriate water rights from farmers in order to protect the environment - i.e. the greater good. As with that principle, if the public (taxpayers) want it enacted they should also be prepared to pay market rates of compensation to the persons whose commercial rights are being appropriated by the Government or face a Constitutional challenge for compensation in the Courts.

And how exactly do we transition clients to fees if the product provider refuses to rebate them back to clients? If we roll them to another product, many will cop massive CGT bills, lose Centrelink grandfathering, or pay unnecessary transaction costs. If we collect the commissions and then rebate back to the clients, it would be a cumbersome and costly exercise for small practices without the resources to manage this. And how does this benefit the clients?

I think it is time for ASIC to be called out on some of the nonsense they are putting forward to the RC. Frankly, they seem to have no idea about the work we do or the value our clients see in our service.

We changed to fees for service predominantly about 20 years ago, however pre 2000 and in some instances since we have taken commissions. I believe the future is about mutually agreed contractual fee arrangements however it was a totally different world 20 plus years ago. Clients did not want to pay upfront fees and many of the early adopters of fees initially worked for love not money. The reward came by keeping and providing the service required by the policy holder for numerous years. What does the policyholder get nowadays? Service when they want it. We have a wait list of referrals, if they contact us they go to the beginning not the end. We have assisted with claims for free. A major advantage when you take into consideration that solicitors are charging a minimum of about $6,000 per policy even for a brain injured person who just needed help filling out the claim paperwork. No argument from the insurance company.
Over 32 years I have seen many things change and if legislation is created to remove pre-agreed contractual income please do not stop there.
Why should members of industry funds pay the same fees to fund a service call centre when one member rings monthly, another yearly and another never to ask a question or for assistance. Reduce fees for industry fund members and fund the call centre by charging everyone a direct fee when they make contact. The same as we would have to do if pre-agreed contractual income is removed to service our existing policy holders who freely entered into a contract many years ago.

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