The large volume of financial planning clients tied to obsolete commission-based remuneration arrangements poses a significant challenge for the industry, according to a senior figure at consultancy group Rice Warner.
Steve Freeborn, Rice Warner’s head of superannuation and investments, refers to the situation whereby commissions from legacy books of client business – those pre-dating July 2013 – can remain in place until a financial planner provides new advice.
He draws largely on his former experience as senior manager of business acquisitions at Perpetual Private, where he worked closely with financial planning practice owners in the sale and acquisition of businesses and client books.
He says that during this time, when advising a practice owner or principal on the sale of a business, they would often view a book of trail commission-based clients as a considerable asset.
“That’s all well and good, but in a fee for service world, those [clients] have paid their fee many times over for the product placement, they’re sometimes not actually getting any advice day-to-day.”
“But if I’m a retiring adviser, bringing up someone from within my business, then nothing changes.
“Now, as an industry, if you want to be seen as a profession, part of that move is adopting FoFA compliant fee for service structures,” Freeborn says.
The issue of grandfathered commission-based clients is likely to be particularly concentrated within some of Australia’s largest institutionally-owned financial planning dealer groups, especially those that have acquired numerous businesses over the last decade and beyond.
Westpac Banking Group, National Australia Bank’s MLC, AMP Financial Planning, Commonwealth Bank and ANZ Bank each potentially hold many thousands of clients paying ongoing trail commissions for financial advice products.
He believes a key part of the challenge for financial planners lies in how they transition to a FFS model – by proactively revisiting clients’ investment portfolios and plans, or waiting for them to act.
“Do they have a plan to transition all their clients, or do they work on the squeaky wheel principle?
“If you’re one of the low balance customers who doesn’t make any trouble, do you ever get moved? [It’s a case of] ‘Who’s looking out for the little guy?’ I guess,” Freeborn adds.
Freeborn believes that in some cases this needs to be addressed at a practice level, but from a licensee level in other situations.
“Maybe a question that needs to be asked is: ‘If I’m on an old product on a trail commission, how do you determine what my expectation is in terms of ongoing advice, is there any obligation for proactivity?
He also points out another potential implication of transitioning clients to fee for service, where financial advisers may try to pack a year’s worth of advice into a single meeting.
“When [clients] front up, they want to know that their income is secure for the next 12 months – whereas the adviser often feels compelled to give them a detailed view of the current investment climate.
“Maybe that’s the issue. In a fee for service world, how do [advisers] justify value for money if they’re only engaging with the client once a year, and that’s for those that are.”
