Recent comments about the “hypocrisy” of grandfathering provisions in the amended Future of Financial Advice (FoFA) legislation are wrong on many counts. The comments raise more questions than they answer. Let’s just look at some of the angles.
Who gets the trail commission if the client cancels the trail or if the trail is cancelled because of FoFA? The reality is that product provider keeps it. So for any client who is currently paying a trail commission and not getting any service, then the removal of grandfathering will not mean that the money is paid to them.
What if the client is happy with their product and their ongoing adviser relationship? Do we think that it is appropriate to force all of these people into a different product that does not pay a trail commission?
What about exit fees, capital gains tax, buy-sell spreads, potential loss or detriment to insurance (for insurance inside super)?
What about the situation where it would be against the best interests of the client to move them out of a trail-commission-paying product because of the implications discussed above?
Hybrid models
There are a lot of advisers who use a hybrid model, where they have clients in a product that pays a trail commission and they also have a dial-up adviser service fee component. They have good ongoing relationships with these clients and the client is aware of what they are paying. These clients will be impacted as well.
It might be a convenient line of argument for someone who has no clients on trail commission and all clients on adviser service fees, however a simplistic removal of grandfathering is not the reality for much of the industry. In looking at this issue we need to be prepared to consider it from the perspective of clients, and most importantly those clients who have existing trail commission paying products and are happy with their products and adviser relationship. There are numerous other client-related issues with this, such as the example of a client in a trail-commission-paying product who wants to choose a different adviser.
Good for professionalism
The AFA strongly supports the ban on commissions for superannuation and investment products. A move to adviser service fee arrangements will be good for the professionalism of the industry. Grandfathering will come to an end over time, but it needs to happen in a manner that actually reflects the best interests of the clients. Clients should not be forced to move, if they are happy where they are and if it is not in their best interests to move.
It is unfortunate that many of the FoFA issues, like the real impact of grandfathering are so misunderstood. The AFA has published information that helps to explain the workings of some of these issues. Please have a look.
Phil is correct in saying that “clients should not be forced to move”, but should they be at least allowed to make an informed choice? It is this lack of transparency that underpins the hypocrisy in grandfathering.
Whilst I support the proposed FOFA change to grandfathering to facilitate choice of dealer group/ licensee for the financial planner without fear of losing her commissions, I think the previous FDS requirement should have remained in place and extended to capture all forms of commission. This way the vast majority of commissioned financial planners who appear to be doing a great job in looking after their clients could not be accused of a lack of transparency.
Incidentally, the reality is that the perceived lack of transparency is a salient cause of public suspicion of our profession.
Regards Ian