Grandfathered commissions debate now ‘out of control’

It is not the fault of financial advisers that grandfathered commissions continue to be an issue in the financial planning industry with neither the Government nor the regulators having expressed an expectation as to how quickly they will decline, according to the Association of Financial Advisers (AFA).

The AFA has told the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that despite all the calls for the removal of grandfathered commissions, no one had put forward a coherent explanation of the policy objective.

Further, it said that those organisations which had been pressing for the removal of grandfathered commissions had little or no skin in the game and that this was symptomatic of the debate having become “out of control”.

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The submission said the AFA was perplexed as to why in the context of a lack of case studies on issues in relation to grandfathered commissions and the lack of investigation by the Australian Securities and Investments Commission (ASIC), that bodies like the Australian Bankers Association and the Association of Superannuation Funds of Australia (ASFA) were proposing the removal of grandfathered commissions.

“ASFA have suggested that grandfathered commissions should be removed within a year of legislation. The ABA have put no timeframe on it,” it said. “To the extent that it would appear that there is a prevailing view that all stakeholders need to offer up something in response to the Royal Commission, it seems that these groups have made the offer to remove grandfathered commissions which impacts an area that is largely unrelated to them.”

The AFA submission said that the organisation had asked the question as to whether the suggested removal of grandfathered commissions was to facilitate the transfer of clients from uncompetitive products to competitive products, which was something the AFA would support.

“… or is it simply to prevent certain payments to financial advisers?” the submission asked.

“The development of such a strong level of commentary and demand for change on this issue in the absence of a clearly articulated policy objective is a sign of a process that is now out of control,” it said.

“How is it possible that an issue that has had little focus over the five years since the start of FoFA and has not been the subject of any case studies at the Royal Commission is now apparently on the top of the list of reforms for so many different stakeholders? This is a question that we would suggest needs to be asked by more than just the financial adviser community.”

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At least the AFA are raising the right questions about the process. Where are the FPA? they seem to very silent on most matters these days.

Phil, the FPA have stated that they are in favor of having grandfathered commissions banned within twelve months. However, I suspect that Industry Super Funds have captured the FPA just like they have captured the other main organisation that oversees the financial advice profession.

“… or is it simply to prevent certain payments to financial advisers?”“

BINGO!!! We have a winner.

To reinforce this look at who are the two parties pushing the hardest to ban mortgage broker commissions and push them into FOFA and full fee for service.

Dante DeGori's personal view (I have in writing on email) is that he and the FPA will only support the removal of commission grandfathering if there is a clear benefit to the client. This was the position pre the Royal Commission hearings, so will be very interesting to see if they have now changed given the FPA appear spineless and bowing to populist opinion these days!

It was very early in the RC that my licensee practice manager was telling me it will be the end of many advisers if grandfathered commissions got removed. That was the first I had heard of it and it wasn't relevant to the advice failings highlighted in the case studies.
I would say Mike is on the money here. The licensees / product providers had already set the game by agreeing to blame it on grandfathered commissions. It was a good tactical move. It's popular to remove commissions from advisers. ASIC would like it. It wouldn't cost the providers anything. The providers could shift the blame elsewhere. And the kicker, there would be less advisers remaining to provide advice to clients to move from old expensive products.
We have been thrown under the bus. Again.

And yet again, the dinosaurs roar as the asteroid of annihilation kisses earth's outer atmosphere. 1) You were paid "servicing commission" to look after customers. That does not mean providing an answering service for ad-hoc queries but providing a proactive service. Too bad you haven't seen your customers in years - you don't deserve the payment. That's what the RC thinks, that's what consumers think and that all means the retention of grandfathered commissions is dead. They're gone. If you haven't begun a transition of those clients to an ASF then you have a problem. 2) There is no perceived political or public benefit in keeping any part of the status quo. Conflicted advice, conflicted products, uneducated advisers (who are essentially sales people) will have no role in the profession of financial advice of the future. Get used to it, it will be an entirely different world in 18 months time. With the almost certain election of the ALP in May, the "old school" financial adviser will have even fewer friends in Canberra. No I'm not an ISF plant or work for ASIC - I just see the writing on the wall and choose not to ignore it.

Big Trev the writing is definitely on the wall. We are moving into a Marxist/Postmodernist communist system. A typical socialist system where competency is pushed to the margins and thuggery to the centre. That is the real agenda that is taking place and Shorten will finish off the final steps when he is in government. If commissions to financial advisers are banned then legislation also need to be introduced to ban mortgage broker commission, real estate agent commissions, electrical appliance sales commissions, mobile phone sales commission, electricity contract sales commissions. In fact all commissions must be banned. Also unions should not be allowed to charge union fees unless a member opts-in every year. In addition, Industry Super Funds should not be allowed to pay their financial advisers a wage because members who do not seek advice are actually paying for the members who do seek advice. How far do you think it should go???? or perhaps it should only apply to private sector financial advisers so that Industry Super Funds can gain a huge legislative advantage????

Absolutely spot on. A must watch is the Yuri Bezmenov videos.

Very true Tony what you have just said. Fully agree 100% with you. Don't forget they must also ban all political lobbyists from receiving commissions for all the wheeling and dealing they do on behalf of various companies and foreign governments.In fact some of these commissions that they receive are also grandfathered.

There is more writing on the wall which you haven't read yet. A bit like that Roman soldier in the graffiti scene in Life of Brian.

The servicing requirement for commission was only brought in for FOFA in the last several years. This was the setup and the RC is the followup hammer to the head. The market was 50/50 in terms of distribution, but their attitude is you can play in the 10% Tony but we are taking the other 90%. Tony's still happy though isn't he. It's a bit like the Best Interests Duty - we'll be back here after a market drop. Bang Bang Bang you are all shot because it clearly was not in the clients best interest. Playing it softly now because you can't categorically demonstrate numerous breaches now, but later that's when they will pounce. I see more writing Trev and I say to you get out now while you can.

Trev, Under point 1, you state "You were paid "servicing commission" to look after customers" The problem with this statement is that the investment manager or super fund is not paying the adviser to service the clients. The commission was/is paid to effectively reward the adviser for placing business with that organization, not to service the client. Look at the PDS or what was the prospectus back then and you will see that it is a contractual arrangement between the adviser and the provider. (Called Asset Brokerage or Trailing Commission paid by that provider. 2.) I fully agree that where the client is at a clear disadvantage and commissions can be rebated, these should cease, but your generalised statements don't seem to consider individual circumstances such as clients with Centrelink grandfathered account based pensions where commissions generally cant be rebated back to clients account, clients in lifetime annuity products etc. In these cases, if commissions stopped they go to the product provider, not the client. There are many advisers out there, like ourselves who operate on a Fee for Service basis, however still have a small legacy book of clients that they look after (and advise), despite the minuscule trail commissions of generally less than 0.44%pa because it is clearly in the client's best interests to remain in certain products and take the trail as remuneration at the expense of what would have been a much higher fee for service. The quickest and easiest way to tidy up the trail commission issue is to put the issue in the hand of the people it really concerns, being the clients. If commission disclosure reporting and opt in came in tomorrow, the adviser that collects the commission for not doing anything would quickly be outed.

Correct Ben that is a deliberate oversight that the Royal Clowns, ASSIC, and the holier-than-thou puritanical zealots ignore; the original agreements had zero to do with servicing clients but was a contractual remuneration paid by the organisation to the adviser. They also are deadly afraid to let clients decide, but are forcing this as en masse legislation, to many clients detriment. The simplest most cost effective solution is have a requirement like opt in where clients decide whether to keep the arrangement in place and put their signature to that decision.

There are emerging clear breaches from Financial Services organisations who have deliberately altered the terminology used to describe adviser remuneration payments.
There are now examples of where the grandfathered commissions payments are referred to " Adviser Service Fee" on the client statement, but is still clearly referred to " Trail Commission" on the advisers remuneration statement !!!!!!!
This is blatantly and manifestly wrong and misleading in that these very well known organisations have deliberately altered the terminology of pre-FOFA remuneration payments to appear as a fee on the client statement.
The pre-FOFA grandfathered commission payments are not subject to the requirement of FDS or Opt-in, but when a client, an AFSL or ASIC looks at the client statement, it would appear as if the client is being charged POST FOFA service fees.
There is an agenda from financial service organisations and other organisations who claim to have a vested interest, but who clearly do not to waste advisers without regard for the clients best interest in the name of a public relations exercise.
There has been much going on behind the scenes with organisations illegally replacing terminology used to describe certain payments to advisers.
Advisers have a legal right to receive the grandfathered commission payments via legislation.
A change in legislation will be required in order to alter the treatment of Pre-FOFA grandfathered commission payments and if this were to occur then the effected advisers and AFSL's should then commence proceedings against the Govt for a breach of Section 51 (xxxi) of the Constitution of Australia in relation to the acquisition of property on just terms.
For the purposes of Section 51 (xxxi), property must have been acquired by somebody, and the acquisition must be for a Commonwealth purpose.
If the Govt change the legislative treatment of the grandfathered commissions, they may then have acquired property from the effected advisers and may be subject to having to provide just terms at the market value of the acquired property.
If the Govt change legislation and advisers and AFSL's suffer a loss of income and a loss of property , then the Govt
(whichever is in power) must pay fair compensation to the effected entities and subjects who will be negatively impacted by the legislative change.
So if anyone in the current Govt is contemplating changing the law, they had also be doing some calculations on the amount of compensation that may need to be paid.

During the Royal Commission cross assassination ( I mean, examination) , ex-MLC Executive, Paul Carter admitted and clarified that the Plan Service Fees attached to the MLC MasterKey Business and Personal Super products were NOT in fact fees , but commission payments!
To which Paul Carter was then asked to define the difference, quite obviously as a leading question.
If Kenneth Hayne didn't genuinely know the difference between a legally approved and legislated pre-FOFA commission payment as opposed to a Post-FOFA fee, then there is a serious issue.
Whether people like or dislike, agree or disagree with the payment of legislated commission payments, the fact of the matter is that it is law these remuneration payments can be continued to be received.
In many cases, the cost to the client may be significantly less than an equivalent fee for service model in combination with a raft of other issues that need consideration regarding best interest.
The argument put forward by groups that are philosophically opposed to commission payments on any level for any product that public sentiment is a reason why pre-FOFA commission payments should be immediately ceased is ridiculous.
If the public were clearly shown that in the vast majority of cases they would be paying higher costs if their product was switched to a fee based model, the public sentiment would quickly revert to a " what is best for me " sentiment.
The calls for the abolition of grandfathered commission payments is based on emotion and misguided idealistic philosophy rather than factual evidence and what may well be best for the client.
Just because a client holds legacy or " heritage " products that provide payment to the adviser via commission, does not in any way automatically mean that client is worse off or disadvantaged.
Many of the people calling for the abolition is because it makes THEM feel good on a personal level.

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