As the first impacts of the COVID-19 market melt-down began to be felt, the Association of Financial Advisers (AFA) wrote to the Accounting Professional and Ethical Standards Board mounting a strong defence of asset-based fees noting that they ensured advisers had “skin in the game” alongside their clients.
The AFA used a submission to the APESB’s review of APES 230 to mount its defence arguing that it believed asset-based fees should be retained alongside fee-for-service and life insurance commission in any refresh of APES 230.
“…we do not see any need for the removal of either asset-based fees or life insurance commissions,” the submission said.
“In Regulatory Guide 175, ASIC [the Australian Securities and Investments Commission] have stated a very clear view that the receipt of asset-based fees does not prevent an adviser from describing themselves as independent. It is also a fact that some clients prefer to have their adviser paid on the basis of an asset-based fee arrangement. They like to see that their adviser has some ‘skin in the game’,” the AFA submission said.
“And this is exactly the case at present, as we observe the material declines in the value of the Australian and international share markets as a result of the coronavirus. As the client’s assets go down, so does the income of the adviser,” it said.
“We also struggle with the assumption that hourly fee arrangements or fixed fees are completely free of conflict, yet there is something inherently wrong with asset-based fees. There are risks with each of the models.”
“In terms of an hour fee arrangement, this provides an incentive to take longer to complete the work, or to provide services that are not important to the client. Ultimately, we believe that clients should have the ability to choose how they pay for their financial advice, and asset-based fee arrangements are an option that many may choose,” the AFA said.