Let’s get real about banning grandfathered commissions

Switching off grandfathered commissions ‘conflicted remuneration’ could wipe out many honest hardworking advisers and would not necessarily be good for their clients.

Since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry began there has been a lot of noise around the banning of grandfathered commissions as somehow being immoral and representing ‘fees-for-no-service’. This may be true in some instances however many commission based clients are receiving levels of service similar to the fee-paying clients.

Conflicted remuneration is defined in RG 246 as any monetary or non-monetary benefit given to an AFSL or its representative which could reasonably be expected to influence the advice they provide to their clients or the products recommended to them.

Examples of conflicted remuneration are:

• Commissions (whether upfront or trailing, fixed or variable) paid by a product issuer to an AFS licensee, either directly or indirectly. (Excluding life insurance products in certain circumstances).
• Volume-based benefits calculated by reference to value or number of financial products acquired by clients.

One of the strange anomalies of the difference between fees that are conflicted and those that aren’t is determined by the application form that was completed at the time.

If the application form provided a space for the client fee to be entered (eg. O.6% of FUM) and the client has been advised that there is a fee and that by signing the form they are agreeing to the fee then this is not conflicted remuneration but is an ‘ongoing fee arrangement’. However, if the Product Disclosure Statement simply stated that a fee was payable to the adviser (eg. 0.6% of FUM) then this is considered ‘commission’ and is, therefore, conflicted remuneration.

For most financial planners operating a business post-2001, when the Financial Services Reform Act made it compulsory to disclose fees and commissions, this difference in forms and what box was completed was immaterial as the fee had to be disclosed in the Statement of Advice. It is highly likely most advisers didn’t give it much thought and probably just kept using the forms and process they had always used.

So when RG 246 and the grandfathering of conflicted remuneration came into effect for arrangements that were in place prior to 1 July 2013 some advisers found themselves in either the grandfathered or non-grandfathered camp, more by chance rather than by design.

Financial planners probably didn’t treat their clients any differently considering that they were receiving the same 0.6% of FUM regardless of how it was received. But from 1 July 2013 everything changed as RG 245 required the ‘ongoing fee arrangement’ clients now had to be sent an annual Fee Disclosure Statement, whilst the grandfathered ‘commission’ paying clients did not.

Surely there is no difference between which fee you charge a client (i.e. the amount) and how you collect the fee (i.e. invoice, direct debit, credit card, 0.6% of FUM)?

Whilst volume-based benefits are more difficult to quantify per client there seem to be three main ways that the financial service industry can deal with the issue of banning grandfathered conflicted remuneration when it comes to commissions:

1. Stop paying commission to the adviser and allow the product provider to keep this revenue

This option would result in many financial planners losing a substantial portion of their annual revenue, in some instances 50% or more and that would be financially devastating to those planners. Even if there was a period of transition, a lot of time, money and effort would be wasted in moving clients onto different fee arrangements or off certain investment platforms.

2. Stop paying commissions to the adviser and reimburse it to the client

This option would certainly benefit the client as they would receive the benefit rather than the product provider, however, the relationship between client and adviser would surely need to be discontinued unless the industry wants to legislate ‘service for no fee’. Also, the problem of financial planners businesses being financially devastated would remain.

3. Treat grandfathered conflicted remuneration in the same way that ‘ongoing fee arrangement’ clients are treated

This option seems to be the fairest and the simplest, the legislation already exists to implement it, RG 245 could be used as the basis for the new rules and advisers already understand it and have set up systems to deal with the requirements. Grandfathered clients would begin receiving an annual Fee Disclosure Statement giving them more transparency around fees they are paying and allow them to choose whether to discontinue these fees and their relationship with their adviser.

As an industry, we need to get back to the premise that most financial planners are good honest people that want to do the right thing by their clients and have spent many years building up their businesses within the rules that applied at the time. They certainly don’t deserve to be financially devastated for the bad behaviour of the larger institutions and a minority of individuals.

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