Licensees who force their planners to pay run-off cover for professional indemnity insurance are charging them an exit fee to leave the group, according to Synchron director Don Trapnell.
In doing so, licensees are demanding payment from their planners for something for which they themselves are not charged — believing this approach will keep planners from seeking a new licensee.
Trapnell said this practice was disgraceful and not something justified by the licensee's PI expenses but was based on the belief that it would build a fence around planners signed to the licensee.
"We (licensees) obviously have PI cover and we do not receive a bill for run-off cover. If licensees are not charged for it, how dare they demand it from their exiting advisers?" Trapnell said.
"Licensees are trying to use some obscure logic around PI to try to keep advisers, but what they are effectively doing is charging an exit fee."
Trapnell said the practice was not uncommon at the stage when licensees sign on new advisers. He warned those changing licensees to examine the terms and conditions of a new licensee agreement as well as the incentives on offer.
"Advisers are being widely courted by licensees offering them, in many cases, huge incentives to join.
"It's all very well to accept a nice dowry when you sign on to a dealer group, but watch the pre-nup for the conditions that apply should you ever want a divorce. Also be careful on your anniversary because renewal agreements may contain the clause."
Trapnell said PI premiums are charged for "time on risk" calculated from total turnover at the start of the period and total turnover at the end of the period and can be in the vicinity of $12,000 per adviser. This effectively signs advisers to agreements with conditions and penalties that stop them from leaving the licensee.
Trapnell said this added a commercial barrier to the free movement of advisers between licensees to the existing legislative barrier created by the conditions around grandfathering.
"At a legislative level, if an adviser tries to leave a licensee they risk losing grandfathering. Where an adviser moves from one licensee to another the advice hasn't changed, the adviser hasn't changed, the client hasn't changed. The only thing that has changed is the licensee — and yet grandfathering is lost," Trapnell said.
"This potentially puts hundreds of thousands of dollars of adviser revenue at risk — and we hope it's an issue the incoming Government will seek to address."