Bowen targets volume rebates
The potential ban on volume rebates will be a cause of concern for a number of dealer groups currently dependent on their payment for survival.
The Minister for Financial Services and Superannuation, Chris Bowen, announced on the weekend that volume-based payments and sales incentives to both financial advisers and their licensees would not be permitted under new legislation intended to be in place by 1 July, 2012.
Included in the ban are volume rebates from product providers, as well as platform providers, to licensees and advisers. The dealer groups most likely to be affected by this ban are the non-institutionally owned, and often mid-tier in size, dealer groups that do not have their own product manufacturing arms and have not yet transitioned to a full fee-for-service model.
Radar Results is a company that facilitates the sale and purchase of financial planning practices. The group’s managing director, John Birt, confirmed that the removal of volume rebates, while commendable, would have a significant impact on the revenue streams — and sale value — of many advice businesses. Birt said his group had been advising clients not to include volume bonus income in revenue calculations when preparing to purchase financial planning businesses.
He also warned that the “sale value of C and D grade clients, including orphan clients” would be affected by the new laws, namely the removal of trail commissions, which some financial advisers have received despite not providing a service to clients.
The reforms announced by Bowen included a requirement for financial advisers to send an annual renewal notice to clients where an ongoing fee is charged.
“It will be impossible for advisers to provide service to C and D grade clients and adhere to the new rules,” Birt said.
If introduced, the new legislation may encourage further consolidation occur in the financial advice industry, Birt said.
“Effectively, the new laws will force smaller practices and licensees to join the larger ones for economies of scale and profitability.”
However Birt did acknowledge that not all advice business would suffer lower revenue as a result of the potential banning of volume rebates and trail commissions.
“If their model has already moved to the new fee-for-service design, then the new laws will have little effect.”
A number of dealer groups are already operating under a full fee-for-service model, while others, such as Count Financial — which has traditionally sourced revenue from volume rebates — are examining alternative structures.
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