Planners brace for the reality of a flat fee for service world

14 February 2019

Flat fee for service with, perhaps, some life/risk commissions will be the dominant remuneration regime for financial planners after grandfathering is switched off in 2021, according to a Money Management survey.

The survey has also confirmed that most planners believe there is little or no likelihood of asset-based fees passing muster under any new regulatory regime, with survey respondents not factoring them into their future plans.

The survey, conducted in the days following the Government’s announcement that it would be backing the switch-off of grandfathered commissions in 2021, has confirmed the likely exodus of up to 30 per cent of planners.

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However, it suggests that those leaving the industry will be, in the main, mostly older planners with significant books of trails and who have decided against pursuing further academic qualifications within the Financial Adviser Standards and Ethics Authority (FASEA) regime.

Importantly, the survey has revealed that the switching off of grandfathering alone is not the major contributor to the departure of older planners but, rather, the combination of both the FASEA regime and an end to trailing commissions.

The Money Management survey has revealed that a significant number of advisers have had little or no reliance on grandfathered commissions and that more than half already have well-established fee for service regimes.

For nearly 50 per cent of the survey respondents, grandfathered commissions represented less than 10 per cent of their turnover, with a further 20 per cent suggesting that it represented less than 30 per cent of their turnover.


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Perhaps Money Management should read FASEA's Code of Conduct Explanatory Statement released a few days ago. Asset-based fees and life insurance commissions have been banned for all self-employed advisers effective 1 Jan 2020. Here is a quote from section 38:

'you will breach Standard 3 if a variable component of your remuneration depends on the amount or volume you recommend of those products, because your interests will or may conflict with your duty to act in the client’s best interests'

In fact one could argue, a flat fee model which has a higher cost for a larger number of products is also banned. But if the same fee is charged for all clients, the fees would not be good value for those who require more simple advice, covering fewer products (so a fail on Standard 7, section 55). I also wonder about those who charge an hourly rate. An SOA will take longer and result in higher remuneration if it covers a larger number of products.... It makes me wonder, have all self-employed advisers been banned by FASEA?

But it is not just self-employed advisers. Those working for a product provider, such as a bank or industry fund have also been banned because they have a conflict of interest. According to Standard 3, Sec 37 all conflicts of interest have been banned and if there is one, advisers must not act.

I find it staggering that Money Management and other outlets have not picked up on this. The Code of Conduct is now set in stone as a 'legislative instrument' so it looks like we are all screwed. If I must close my business and walk away from my clients on 1 Jan 2020, then I would like to know sooner rather than later. Can you please get some debate going and seek comment from lawyers specialising in financial services. Thanks and regards.

Once again self employed adviser, you have misread the regulation and explanatory statement.

You appear to be the only licensee/adviser that has this opinion.

According to FASEA, only 18 submissions were received in the last round of consultation (37 overall). So I think it's safe to assume most of the 20,000+ advisers and licensees have no idea what is going on. Have you read the document yourself? If you think I am wrong, please tell me why and quote the specific sections of the CoC explanatory statement.

Self-Employed - that section of explanatory statement was clearly talking about Advisers who are recommending products owned by their employer or principal. So basically if you work for BT/Westpac and recommend BT life insurance or BT Wrap then your remuneration cannot be tied to volume of the product written. Nothing to do with self-employed Advisers.

Brett H it appears you and I are the only persons who have read the documents correctly. What all the other contributors are saying has nothing to do with the subject. Talk about going off on a tangent.

I take your point, but how do you explain the following case study which is contained in the explanatory statement. There is no reference to whether or not the adviser is an employee of a product provider or a self-employed independent adviser:
'Harry recommends that his client Fred acquire a particular financial product. Harry’s remuneration includes a bonus depending on the volume or value of that financial product that is sold. Harry’s potential entitlement to the bonus creates a conflict of interest or duty, as it would reasonably appear to influence his advice to Fred'

That case study sits within the explanation of Standard 3. Points 37 and 38 directly above the case study explain the context and once again it's do with whether you are recommending products owned by your employer and if you are you will breach Standard 3 if you're remuneration is tied to the volume of that product written. So in my example above with Westpac/BT, a BT Adviser can recommend these products but only if they don't receive bonuses as a result of the volume of product written. Here's point 38 that explains it.

38. You will not breach Standard 3 merely because you recommend to a client financial products offered by your employer or principal. However, you will breach Standard 3 if a variable component of your remuneration depends on the amount or volume you recommend of those products, because your interests will or may conflict with your duty to act in the client’s best interests.

Thanks Brett and Billy, I appreciate your input. My key point, is that there shouldn't be any grey areas. The Code should be black and white. As it stands, lawyers and code monitoring bodies could interpret the code very differently to you or I and we may never know what FASEA actually intended. Standard 3 is extremely broad, simply stating: 'You must not advise, refer or act in any other manner where you have a conflict of interest or duty'. So the big question is - what is a conflict of interest? FASEA only offer a small number of examples. There are lots of questions. The explanatory document should list examples covering all the typical scenarios. This would provide clear direction and remove any doubt.

I'd be more concerned about Standard 4 - my reading of it says that you need to get explicit consent from your existing clients to be able to charge them a fee from the date the Code begins or as soon as practicable afterwards. This means that for every client that you are charging a fee you need to have a fee agreement signed by them, it can't be the same agreement that you've used in the past because they were agreements that lasted for 2 years. So basically you'll need to design a new fee agreement document and have every client sign it within a relatively short time from the 1st Jan 2020 (which is when the code starts). This will also capture all clients who were previously grandfathered under the FOFA rules.

You'll be doing this anyway under the new maximum 12 month fee agreement rules but the short-time frame could be very difficult for larger businesses.

I read 'as soon as practicable' as the next client review. Given we will be forced to discuss fees and get clients to sign them off, this is probably the opportunity to put our fees up. Most of us have undercharged for years and have absorbed FOFA, LIF, ASIC funding, TPB etc. But FASEA and the proposed Hayne changes are a bridge too far. This will be one of the lasting legacies from Kenneth Hayne's Royal Commission - 5,000,000 Australians will be told their fees are going up and his name will be front and centre.

Advisers will just get 3 years of agreements signed in advance, date them in advance if you like. They can be terminated immediately anyway by the client.

Very simple - if Harry’s licensee is not a ‘product issuer’ Harry’s licensee may recieve a volume bonus from the issuer and the licensee rewards Harry for selling the issuers product which in turn generated more income for Harry’s licensee. If Harry’s licensee is a product issuer the same applies.

Yes I have read the documents and as I responded to your post in another publication it has nothing to do with how an adviser/licensee charges a client. It is about an adviser recommending their licensee’s product and being rewarded for that (read bonus or other payment) because they sold the product. So simple to understand.perhaps the reason there were only 18 responses to the consultation was because everyone else understood it and had no problems with it. Brett H (below) understands it. Don’t know what all the other contributors are rabbiting on about.

Interesting, so if fees are lower for less products, then most advisers should recommend a Multi-Manager structure rather than construct a portfolio themselves, yeah I don't think that's the interpretation surely?

That's the way I read it. But before you rush off and recommend a multi-manager ......'You will also need to consider whether your product recommendations should be limited to “ethical” or “responsible” investments' (Standard 6, section 49).

What's the criteria for a fund manager to show that their product is 'ethical' and 'responsible'?

I'm a self employed adviser and i have no idea what's going on. Are they saying the more products you recommend the higher the fees? I construct client portfolio's with an average of 6-10 investment options which mostly work out cheaper than recommending a multi-manager option.

I think it is merely saying % fees are not acceptable. I guess the answer is to review every client and charge them an additional $1200 to do an SOA to change the fees to $ amounts... Seems inefficient if it is not part of your annual reviews. I wonder if the same logic will apply to super funds who charge % fees?

For anyone interested, here is an example from the explanatory document. Seems the consequences could be significant unless I'm not reading it correctly.

Appendix: Case studies

Case Study A

Anna and Brian, a married couple, are seeking advice on improving the performance of their superannuation funds. The adviser (Margo) is an authorised representative of Acme Financial Planning Pty Ltd.

Margo advises Anna and Brian to roll over their superannuation benefits from their current funds (not related to Acme) to Acme funds. Margo does not attempt to compare Brian’s likely returns if he were to stay in his current fund with those from the Acme Fund. She ignores (or does not address) the increased ongoing fees that Anna will have to pay in the Acme Fund.

Margo has failed to demonstrate, realise or promote the Values of competence and diligence.

She has breached:

· Standard 2—her advice was not in the best interest of either Anna or Brian;

· Standard 3—as Acme received a benefit from the implementation of her advice to switch to Acme funds;

· Standard 10—her failure to consider relevant issues (Brian’s likely returns, and Anna’s ongoing fees) does not demonstrate competence.

And this - the end of safe harbour?

34. The ethical duty in Standard 2 to act in the client’s best interests is not identical to the duty in section 961B of the Act. Sections 961B(2) to (4) describe a series of steps that a relevant provider may take; if those steps are taken, the relevant provider will have satisfied the “good faith” duty in section 961B(1). This Code does not have any equivalent provisions. So, even if you follow the steps set out in section 961B of the Act, you may still not have complied with the duty under the Code to act in the client’s best interests.

Unless licensed be a dealer group where there is BOLR in place guaranteeing exit price, I fail to understand what adviser wants to sell their book of trail under the current environment? Surely, from building business value perspective, if not subject to BOLR, worth sticking it out.

Seems like a buyer's market for the forseeable future

So, advisers are no longer able to be remunerated by volume based payments from super owned managed funds . However fund managers and super funds are able to charge volume based fees on managed accounts and super, for no service. Advisers are legally complelled to act in the best interests of clients, but fund managers and super funds are not held to this standard. Advisers are held accountable when the managed fund makes a loss, but the fund managers are still able to charge their volume based fee.

With this in mind. Why would we not just start our own Managed Discresionary Account and start to charge volume based fees?

Can we please please please have one set of rules for everyone. Noting that self employed financial advisers with clients they have met are the only ONLY sector of the financial services industry who ever actually worked in their clients best interetst in the first place.

Im sure all non AMP/Bank advisers would agree. We want to retain our clients for life. It is not a transactional industry. It is about building trust, retaining long term relationships and looking after the needs of our clients (other than institutional advisers where its churn and burn).

On another rant......Bank advisers and particuarly AMP advisers have rolled clients for too long. A few years ago, pre FOFA, every time i was referred to an AMP advisers client i was disgusted. Super disgusted. I am a youngish adviser and these AMP/bank scammers charging 5% contribution fee and 2% ongoing is a rort. It wasnt just AMP/bank advisers. Business super accounts where the adviser never even saw the client yet got paid a contribution fee and an ongoing fee plus an insurance commission was a total scam. Luckily all these old timers who have taken advantage of regulations will be booted by FASEA and retire in their toorak mansions. Its not their fault, who wouldnt want to get rich for doing nothing.

But....Dont make the youth and mums and dads of today pay for the greediness of the advisers of the past.

I realise there are some contradictions in the above statements. Im just angry that the old guys have ruined it for everyone and have been suported by the banks and institutions, particuarly the FSC and AFA who's management would sell the blood of their children if they thought they could make some money.

Plus, the insurers know who the churners are. I know who the churners are, ban them and let us get back to helping clients with their financial security.

James 22 I agree with much of what you have written, until your last four paragraphs. with forty year's industry experience (yes, i am an "Old Lifie," I do not own a Toorak mansion. I don't live in Melbourne for one thing. I have never had a complaint levied against me in those forty years. I do though have many friends that started as clients. When they went on claim under income protection, claimed under trauma for heart attacks or cancer, were admitted as totally and permanently disabled or their family members died, I never charged them for helping them with their claims. I still do not and never will. I have operated for insurance on the hybrid commission model since 1995 and cannot ever recall "churning" a policy. I have said hundreds of times to clients that "usually the best insurance that you can buy is that which you have already bought" Churning starts the non-disclosure period again, often the "modern" policies have poorer definitions to the "old" ones, particularly with income protection. I charge flat fee to new "investment" clients, but do have many clients on a percentage basis, but let's take note that many of them started with a nil balance when I recommended a Fund to them and received little or no remuneration until their balances grew, mainly with employer contributions.

I won't be in the industry after December 31, 2023, or probably earlier if my remuneration disappears. So I guess it is goodbye to me and you must be pleased about that. However my clients, my friends will not.

Well said and good wishes with your retirement. Im also not able to continue. many clients will not b happy. James22 makes a lot of assumptions/errors and I can see he is young in the industry. Thinking that entry fees at 5% and a adviser charges 2% ongoing. Never seen it and Im not aware of any product that has dial up that could do that across the market. So he is making it up.

We do about 30 life claims a year and many are not our clients of which in recent years we introduced a few for no clients and we do know our success is far beyond and far cheaper than the legal offerings out there. We know what we uncovered and know that many other services cant do that. In one case NAB adviser had finished their claim on tpd and the guy cam in with a 300 RSA. We found another $180,000 of super and mainly insurance. One TPD had been cancelled a year before. However we got them all paid. It was evident the nab adviser knew of the existence of these funds but it was not obviously feasible for hi,m to manage it and he told the client in some words but the client being indigenous and not really literate and now blind, didnt have a hope in hell to follow this up. I guess it was compliance and `work load of the bank that stopped him from completing the job? Our outcome was a tremendous result for a often over looked person. We learnt a great deal out o this and to learn of his life as a 9 yold and taken in the policy to protect children. he spoke of how good that was and that it saved his life. His mum died at around 28 from alc poisoning and had him at age 14 from a family rape. Sadly he and these people from that era are not allowed to share the positive side as its politically required by the community to keep the pressure on government about the stolen generation which was not a racial issue. The experiences we come across yearly equip us to understand and we see many holes in the system where we cannot protect our clients. the aboriginal community having a man who gets 180,000 and is blind, who opens the letters, and how long will the money last with the pressure they give. The first 93000 lasted just 3 months from NAB. We had to get him to open his own secret mail box to protect him and he can collect mail once a year if he likes. But he will keep his money and not be kicked out of his culture.

Once again, i found james 22's points qas sadly inexperienced and trying to draw a conclusion that it is a dealer group issue and his quote of feds illustrate he may be passing on a Chinese whisper given those figures couldnt be done.

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