Don’t blame planners for trails

The Government and regulators need to recognise the purpose of trail commissions attaching to legacy products and that they were the strategy of product manufacturers and licensees, not advisers, according to financial services business broker, Paul Tynan.

Tynan, the chief executive of Connect Financial Services Brokers, said it needed to be remembered that the trail commissions attaching to the legacy products were incorporated into their design to remunerate the adviser for their advice and were not part of an ongoing advice arrangement.

His comments come against the background of a submission from the Financial Planning Association acknowledging the possibility of a three-year phase-out of grandfathered trails and suggestions by the Australian Securities and Investments Commission (ASIC) that it had never backed long-term grandfathering as part of the Future of Financial Advice (FoFA) changes.

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Rather than trails attaching to legacy product, Tynan claimed that what had caused many of the bad advice practices highlighted by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry had been industry business models and product providers.

He said these parties had caused a misalignment between planners’ advice and clients’ best interest.

“This has been allowed by successive governments, ASIC and institutions because of the honey pot of superannuation,” Tynan said. “FoFA brought the planners and clients’ interest into alignment; however, ASIC and government continue to only listen to the failed captains of industry who put flawed business structures in place to serve their own self-interest. For example: Vertical Integration; Buyer of Last Resort (BoLR) and Dealership Licensing.”

“These three practices have been responsible for driving a wedge between clients and advisers,” he said. “Don’t blame advisers for trail commissions when they were a part of the product design and the only product available to satisfy client needs. Trail brokerage in these products did not constitute an ongoing service arrangement.”

“Banning commission retrospectively fails to acknowledge that individual advisers have borrowed to acquire businesses and client registers to underpin commercial expansion on the assumption that trail commissions would be continued to be paid for the life of the individual policies,” Tynan said.

“If the product manufacturers want to ban grandfathering, are they going to:

1. Buy back the trail commission from the adviser at a commercial market value

2. Pass on the trail commission value back to the clients

3. Help advisers facilitate the transfer to new products which would require a case by case evaluation and to undertake this task would require contacting and discussing the matter with each and every single client, issuing a SoA and so on. 

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The reality is that commissions have been replaced by other sources. Ask advisers about the new Licensee Advise Fees they are seeing. The Licensee charges the client a fee, yes charges the client a fee, in order for the adviser to be able to provide advice. The get away with this because they negotiate a fee discount with the super fund. But the client can't turn this fee off without going back to higher pricing. In some instances the clients are worse off than standard pricing. Isn't this just the same old commission system but in a different box???

You have incorrect mixed logic.

Your statement 'in order for the adviser to be able to provide advice' has no connection whatsoever to the fee negotiations between AFSL's and product or platform providers, Aggregation is not a new concept, and negotiating fee reductions based on volume (and then the AFSL gaining a fee while still placing the client in a better position) is called commercial reality.

In all commercial capitalist based endeavours, volume is important, recognised and rewarded in one form or another across every single industry and profession across the globe.

You don't think Steggles provides chickens at lower prices to Coles or Wollies or Lenards chicken outlets than smaller convenience stores? If one of Lenards shops left the franchise and went out on their own, of course they wouldn't still get the discount.

In your own business, you would have to treat your 'A' or 'Platinum' or best fee clients differently then your lowest fee clients - that is still volume based recognition. If they didn't like your business and decided to take 95% of their advice needs elsewhere, would you still treat them exactly the same and if so, for how long could you afford to do that?

Even politicians pander and do deals with those lobby groups who can deliver more voters (volume based reward system) - if you think budgets or spending is based solely on need or 'best interests' of Australians, then you're even more naive then your comment suggests.

Wouldn't be charging a percentage of transaction value would you Paul? If you are maybe you need to move to a fixed fee. That way the banning commissions won't impact your revenue and you'll be conflict free on the issue of commissions.

I can guarantee you this. The product manufacturers are rubbing their hands with glee, just like they did with LIF. Trails will be banned. The product manufacturers will claim that due to having legacy products it is easy to stop paying advisers but not the deduction from the client account. Advisers will no longer receive trails, but the product manufacturers will keep it instead. ASIC, the government, the Royal Commission etc will all pat themselves on the back despite being hood winked by the product manufacturers yet again. Ask yourself after the FSC successfully peddled the lies around churning do you know any insurance client who has seen their insurance premiums reduce since the introduction of LIF. Advisers get paid less, clients are paying more and the product manufacturers are laughing all the way to the bank. None of the behaviour of the banks and AMP raised at the royal commission will change one bit and yet again they are the only ones who will win out of the mess they created.

Yeah but perhaps advisers could then also do their job and move the 99% of clients who are in legacy products for no reason other than the trail, to appropriate products and charge a fee for a service they provide. Crazy thought I know.

Reality, said like someone who has no idea of the time, cost and very importantly the tax issues that arises when you do this. Great in theory though, if only it was that easy in reality.

Completely aware of all of this, have moved plenty of clients from legacy products. Time and cost becomes irrelevant, we get paid as advisers to do whats best for the client. Very few instances taxes make it prohibitive.

Still sounding a bit naive and preachy or 'holier than thou' without broad industry experience Reality. Agree a lot should be done for the old books where advisers sit on trail without doing anything for the client, (knew one fat lazy old despot up in his Woree, Cairns who once boasted he had clients paying him $8k a year that he hadn't seen for at least 7 years, which was repulsive), but a broad wholesale banning will also destroy aspects of professional businesses that are beneficial to clients, the clients are aware of any remuneration and are more than happy with the result.

We have a number of very high wealth families that we worked hard alongside their accountant, a tax specialists and an estate planning solicitor to enact some exceptional estate planning outcomes that provided immensely valuable asset protection and inter-generational wealth advice to the clients that involved some extremely rare grandfathered commission based products after intensive research from all firms involved. Everyone is aware of the structure, the costs and the desired result. Whether it is paid via a fee or in this case where intrinsically a commission cannot be turned off (commercial reality, organisations don't have limitless wealth to completely overhaul systems on all products at any given whim, although ASIC obviously do not care about commercial realities or financial outcomes to anyone even clients) is immaterial.

If it's not broken don't fix it doesn't apply here obviously, but perhaps more apt is that other phrase spoken by that quite intelligent articulate wordsmith; "If it is broken in parts don't get a f*cking sledgehammer and smash it all like a befuddled ignorant moron".

And yes, I am sounding ranty and preachy myself, but befuddled ignorant moronic approaches, like ASIC have touted in their biased conflicted incorrect report (have a read of it and all background material, you will note a distinct lack of balance in their supposed research and conclusions) definitely does not hold with any degree of 'professionalism' as does the FPA's lickspittle approach while they themslves have conflicted remuneration issues identified at the RC.

John M, I have a lot more time for those who actually service said clients. Ive been in the industry for quite a long time I just think it is very naive to think there is not a significant amount of advisers sitting on these grandfathered arrangements and not servicing... I can name 10+ practices in my immediate area.

An alternative would be to legislate rebating any commission received to the client and the commence a normal fee for service arrangement. This is what independent practices do and circumvents any issue where the legacy product is still suitable due to centrelink etc. Also puts the ball back in the client's court to determine whether the adviser is worth continuing to be paid.

Well said Paul , thanks once again for standing up for the advisers

Once again advisers face the problem of Not being able to move many clients from Older products due to the deductible amount they will lose in relation to their Centrelink benefits, so easier said than done.
It shows a lack of understanding by the product manufacturers of how the Age pension system works

Most advisers I talk to say why should they rebate commissions when their representative body, the FPA, gets commissions from CBA,AMP etc etc.

So, we are going to move all of our legacy clients to modern products so that they fall under the new regime are we? I tried that. My client had an old retail managed superannuation fund with us for years paying a 0.4% trail. We provided a good service to him for his money over the years. I contacted him and said that he would do better to transition to a wholesale version of the same product and we would charge a 0.4% adviser service fee. Went through the whole process, SoA, paperwork etc and didn't charge any fees for the work. On the first anniversary, the client refused to opt in so our service fee was cut off. I'm still pissed! Hard to justify charging an up front fee for changing a clients existing investment based on the advantage of saving a client money. Its a big disincentive! Also what about all of the legacy clients who simply do not respond to invitations to review their investments? Anyone who's been an adviser for a longer period of time has them. When the trail gets cut off, do we still want the potential liability of having them as clients on our books with no remuneration? Not to mention all of the business purchases based on multiple of earnings including legacy trails. I cannot believe the FPA is advocating for this on behalf of their members. ASIC also has not thought through the implications either. Its the clients and and more importantly the ones who really need advice that will suffer for this.

Yes Roger, there are going to be clients lost and the reasons for losing them will be different. So, why did he cut the service off? It could only be that he didn't feel he needed it any longer. If you couldn't convince him otherwise than a) at least he no longer pays for services not rendered and b) You can't convince them all they need you, at least you aren't receiving guilt money for doing nothing, which he has told you he wants for the future. What you are saying is I shouldn't have made him aware of the cheaper product and we'd still be sailing along. That is a conflict, that is why the whole basis of Best interests and the RC is about. If you get no remuneration, they are not clients - no liability, that argument doesn't exist. The SOA you had to do to recommend the changes, well, you chose to do it without cost. Maybe you did it because you've received X $ for so many years so this was catch up? I don't know, but you made a commercial decision and it didn't work out. That's life.

Hahahahahha Roger you have just justified the Royal Commission perfectly... You are basically saying when moving to a fee arrangement the client needs to resign to, they dont feel your service is worth it... Instead, you would rather keep them in old, below average products because it is better commercially for you... That is literally case and point why these arrangements need to be ceased.

I can see where Roger is coming from however I think Roger your comments highlight the position many advisers find themselves in. I would encourage you to google the words Fiduciary duty and read about it. Many advisers work for institutionally owned licensees which all work on FUM and have not been educated on what actually is the best interest obligation. You see since 2013 you've had a fiduciary relationship with ALL your clients. i,e you need to walk in the clients shoes and do what's in the best interest of the client. So if that means moving them to a better product then Yes and if they're not going to be committed and involved EVERY year to the advice process sack the client prior to doing the work and forgo the commission. In 2013 I started turning off fees, turning off commissions gradually and I've remodeled my business. To quote ASIC indirectly. "we don't care if FoFA leads to job losses in the sector". The days of 400 clients and AUM thinking was over in 2013 and you're licensee probably let you down in not adapting.

Saying the trail is not related to an ongoing service agreement is not correct in all cases. In fact in many cases practices receive both a trail ( say 0.44%) and Fee for service (0.66%) to make 1.0% +GST, Both the fees/trail/revenue are connected to a Services Agreement. Yes, hate to be cynical, but business brokers may be seeing the value of transactions decline and will further decline, hence their revenues.

Years back I went through and transferred all clients from retail to wholesale, this was pre FOFA, did the comparisons of .60% trail in retail versus 1.10% ASF on the wholesale investments. Clients are a lot better off and so am I. These legacy products are a great way to get the clients interested again if you approach it in the right way. You can buy a book like this of legacy clients and convert the lot over to fee for service and the clients will not actually pay anymore, in most cases they will pay less, see the saving and benefit and stay with you.

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