Future of Financial Advice (FoFA) reforms risk undermining and potentially ending some independent advisory models that have been developed over the past ten years.
Specifically, a senior industry player has raised concerns about administration fees that financial planning practices receive from platforms but which are not passed on to advisers.
The changes could even see a flight by senior players into the institutional ranks as business models that seem to comply with the spirit of FoFA are tripped up by volume rebates.
Grant O’Riley, managing director of Capstone Financial Planning, made the case for some independents at “The Final Countdown”, a roundtable discussion recently convened by Professional Planner.
Bernie Ripoll, chairman of the Parliamentary Joint Committee (PJC) on Corporations and Financial Services, was questioned about planning businesses that run all the major platforms with no incentive for advisers to use a particular one.
“Ten years ago I had a view that it was very important to develop a business model that removed conflict,” said O’Riley. “We are independently owned and operated. We have no product bias whatsoever.
“From day one part of our value proposition has been that we would never incentivise an advisor to use a product or platform.
“We’ve got state of the art technology that we believe will cope with the FoFA changes. So in the main the findings that are presented – we’re comfortable with.
“But there are a couple of things that are going to bring about the demise – I’m not saying of Capstone – but some groups that have got a model like us because if we receive an administration fee from running our Wrap, that doesn’t go to the advisors but we use that as part of building the technology platforms to cope with change such as this.
“Capstone runs an extensive platform environment of all the major platforms. So we train and develop the advisers to use the most appropriate solution for the client. So it’s generally needs based and the advisor doesn’t get anything more from using one or the other.”
These volume rebates from the various platforms are not large but have a cumulative effect.
“Now, you remove that money from a growing independent, you remove our ability to not only continue to have technology answers in competition to the major institutions, marketing of independent practices throughout Australia,” said O’Riley. “You’re removing our ability, or downsizing our ability to do that.
“Not only do you do that but Capstone is one of the few positioned in Australia with this model. But we are one of the few genuine independently owned groups that will solidly penetrate the accounting fraternity once their licencing requirements are known.
“You remove our ability to play that market place if you remove the ability for a licensee to receive whatever you want to term it – administration fee or a volume rebate.
“And you remove my ability to be a major player in this industry by not allowing the licensee to receive an administration fee from a wrap account or rebate from a product provider.”
While Ripoll continued to maintain that a conflict exists, O’Riley explained the Capstone model.
“There are some groups that will have two or three platforms only on their approved product list and a good range of underlying funds – you could perceive that that has some form of conflict because they know that the recommendations from the advisor for the client are going to go into one of those three,” he said.
“And they can bulk up some serious money. In a group like us I think we run twelve or fourteen platforms. Now some are better than others. Some have different whistles and bells than others.
“But our environment is that we educate the advisors in the broad range of products and platforms and their role is to select the most appropriate platform if that’s what’s to be used, for the client.
“Now, some might be a low fee with normal packaging. Some might be a fully blown rapid count whereby it’s got fully blown reporting. It comes down to what the client wants. Different offerings, different charges and value propositions.”
Correction: Grant O’Riley was originally identified in this article as Graham O’Riley.
Self-interested comments follow: I am the CEO of an independent platform, by which I mean not only are we not owned by a financial institution, but we also don’t provide advice nor manufacture product. Our role therefore is only providing an excellent admin service, largely to independent advisers. We don’t provide rebates. Our systems are modern and transparent enough to enable a dealer group to add its own fee on the application form to address what previously it might have received by way of a volume rebate. The FOFA reforms should make no difference to a dealer group’s bottom line in this regard – as long as the platform used is flexible enough to accomodate what it, the adviser and the client want.
I continue to be disappointed that debate still goes on about platform rebates. Twelve months ago my views on this subject were published when I suggested that “platform rebates” had the potential to be the the most fiercely fought area in fee saga. The reason is that the business model of numbers of dealer groups have been designed around this platform provider bounty. So called rebates are the classic example of of a payment received for doing nothing. When their banning was first announced two of the largest dealer groups immediately announced that they would have to make radical changes for their businesses to remain “sustainable”‘. Any business that relies on unearned revenue has, and will continue to have a problem in the FOFA era – and in the even more transparent era that will inevitably follow.
All players in the value chain including asset managers, platform providers, AFSLs and financial planners deserve to be paid, and paid well, for the work they do. Nobody deserves to be paid just for using a financial product or service. The sooner all financial service professionals recognise this reality, the sooner the public will differentiate them from liquor distributors and car salesmen.
Couldn’t agree more, Rick & Mike.
I have a client who has been in the liquor industry all his life. He has recently purchased a new store and was discussing the figures with me. One of his comments was about moving his store away from the current ‘buying group’ to another one because of the better relationships he had and the better volume rebates he would enjoy. Does he have to disclose this? No way!
The argument for the heavy fee disclosure in our industry is that we are dealing with people’s largest asset outside of their home. That’s fair enough, but if you place it alongside alcohol, I bet a lot of people would spend more on grog per year than they ever would with a financial planner.
And let’s not forget that the biggest impost on a clients super account or their grog bill will be the tax take from the various levels of government.
So what you are saying is the clients of the small should fund the clients of the large ?
Ian’s comment about small clients subsidizing large clients is a social justice issue, not a free market fee issue. If we want the advantages of a free market then we have to accept that some people will pay more that others. So what is wrong with that?
If he is worried about certain groups being disadvantaged then let’s have a safety net for them (My Super) rather than taking a one size fits all approach.
The financial system is going to slow to a snail’s pace as a result of all the regulation and compliance meaning that costs to consumers will go up. This is despite the government saying that it wanted to bring down costs to consumers.
The client knows what they are paying as that has been disclosed already. Do they really need to know how the profit is split? This argument is a stupid waste of everyone’s time. Why shouldn’t a business be able to create a benefit by using its buying power to strike a better deal?
Does anyone ask the liquor store what extra benefits they get by buying in bulk. Do we make Harvey Norman disclose the factory rebate they get for buying 10,000 TV’s instead of only buying 100? Does the local car dealer have to give back his factory bonus for selling more than X cars in a month?
The total fee is disclosed just like in any other business and the client knows exactly what they are paying. They can then make their own choice. If some businesses decide to give the rebate back to the client then that is their own call and market forces will dictate.
Mike makes a very good point. He is a product saleman and not an advisor. He should be allowed to continue in his business of flogging product whether it is cars or grog or investment products and leave advice to advisors.
My view is that platform rebates are the result of market place buying power. Advisers working for large groups have greater buying power and so can pass on the benefit to clients if they choose to. It is the law of the market place. No different to Harvey Norman or Bunnings.
Undisclosed commissions, overcharging, or not providing service are ethical issues. Let’s not confuse them with volume discounts which is what rebates really are.
Andrew I read your article “Independent models hamstrung by FoFA” and note that it is based on statements by Grant O’Riley about how the Capstone model works. Whilst I have no issue with how a dealer group gets remunerated I do have an issue that the client must clearly understand the cost and then make a value decision.
In reality what Grant is saying is that part of the fee paid by clients to the platform provider is used to fund services offered by Capstone to the adviser! Surely then if these rebates are banned then there are two options:
1) The Capstone value is recognised by the adviser and the adviser is happy to pay for this service , and may even recoup this from the client .
2) The client is advised about the service that is provided by Capstone and makes an informed decision to pay the fee, which should be no higher than currently paid if the platform reduces their fees accordingly for the rebated amount now not paid.
There is no defence for the continuation of platform rebates. The rebates are either undisclosed commissions, or a fee required to recover costs, in which case a client should have no difficulty in paying.
If we want to be professional then let’s get rid of all these undisclosed back handers.
Ian Bailey is missing the point here and I don’t blame him, because the article and Grant O’Riley didn’t mention one of the main points against the banning of volume reabtes.
Instituionally owned dealer groups (ie banks and industry super funds) are subsidised by the institutions so that they can discount their fees. None of that is ever disclosed to the client and FoFA simply ignores it. Wayne Swan is on record as acknowledging that this, but has stated that it is too hard to stop the institutional subsidising and therefore the government is only going after the platform volume rebates. The obvious conclusion to be drawn is that the government, and particularly the industry super funds, are trying to close down independantly owned dealers.
The AFA has been fairly vocal about this, but unfortunately, the FPA seems to be silent on the issue – perhaps bowing to pressure from its institutionally employed members?
One other comment on Ian Bailey’s comment – My dealer group receives volume rebates from platform providers – and I always disclose to clients the amount of rebate we receive. I suspect that the vast majority of independently owned advisers do the same thing. If that is the case – where’s the problem? I believe it’s just with the institutional adviser not disclosing the subsidisations from their employers.
Seems we all believe the other misses the point! To determine value I must know what I am paying for. To say the client knows the total does not define the value. If a percentage of the total goes to a third party – read dealer – does the client know this and know why, it isn’t disclosed? I make value choices by comparison. I don’t take platform rebates, secret commissions. My clients know exactly what they are paying for and to whom they pay!
Ian: Yes, my clients know what is paid to the dealer, to me and why. That is what I was pointing out. I disclose it – the percentage vaue and the dollar value. There are no “secret commissions”. Am I wrong in thinking that this is the law? – full disclosure of fees, commissions, brokerage etc. no matter to whom it is paid? I would have thought that all reputable, professional advisers do the same – so I don’t see a problem here – the law already covers it. What it doesn’t cover (and what FoFA and the government ignores) is the “secret commissions” received by the institutional advisers by way of subsidisations.
Where’s the “level playing field”?