Buy-back contracts under scrutiny

Despite moves in the industry to remove perceived conflicts of interest, questions still remain about 'buyer of last resort' (BOLR) contracts between dealer groups and their aligned planning practices.

The buy-back provision was created to provide retirement security to planners, with the first BOLR contracts offered in the late 80s, according to Paragem managing director Ian Knox. Since then, dealer groups have moved to alter their BOLR contracts to combat the perception that they offer more than the market rate to practices that favour their products.

"It's been accepted by the [Financial Planning Association] and other entities that BOLR should be stopped," Knox said. "How do you look after your clients' best interests without acknowledging that you're going to get more at retirement than would be commercially available in the market?"

For his part, FPA chief executive Mark Rantall played down the suggestion that BOLR agreements were causing planners to behave unethically.

"I don't think BOLR in itself is necessarily a conflict, provided it is well disclosed to clients … What is important is the individual financial planner is a member of a professional association and adheres to its code," Rantall said.

Knox said that his biggest disappointment was that the leaders of the industry were undermining the industry's push towards professionalism by offering them BOLRs above the market rate.

"Anyone who is going out and paying advisers hundreds of millions of dollars above commercial values is undermining the advice profession," Knox said.

The BOLRs offered by different dealer groups vary from two times recurring revenue to a maximum of four times at AMP Financial Planning (AMPFP) for experienced planners, according to Forte Asset Solutions director Stephen Prendeville.

"AMPFP is self-perpetuating. It's a self-contained business unit and there's this expectation that everyone who's been there for 20 years will sell at four times," Prendeville said.

"People join with the knowledge of a BOLR, so if AMPFP were to shift that it would pose a real business risk," he added.

Kenyon Partners principal Alan Kenyon said AMPFP could afford to pay above the market value for the practices of experienced advisers because it had a stable of younger advisers ready to take over the reins.

AXA Financial Planning's BOLR is the most proactive on the market, according to Kenyon.

"It's structured that it's there in the event of death and disablement - it's a proper BOLR," he said.

A spokesperson for AXA Financial Planning said his company's BOLR was generally below the market rate and did not contain a bias towards products.

"We have changed our BOLR recently due to the merger of AMP and AXA. The methodology is still based on revenue, but it's part of a negotiation, so it can vary," the spokesperson said.

MLC changed its BOLR contracts in 2006, valuing practices at the current market rate rather than through a set formula favouring in-house products - although the existing contracts were grandfathered.