Now is the time for big and bold statements to come from within the financial planning industry.
The wave that rolled over the fledgling financial advice profession during the now heavily discussed Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has left a trail of reputational damage; as far as the broader public is concerned, actors with malicious intent are indistinguishable from those with pure intentions and the best interests of clients at heart.
Above the high water mark, the industry’s unsightly debris is exposed for all to see. Submission after public submission reveal the dirty secrets institutions and supposedly independent advisers have been using to get clients to overpay for services systematically, plying them with the wrong advice based on biased recommendations.
Advice practices using ongoing advice fees paid by people they’ve never met to inflate the value of their businesses, firms shoehorning clients into proprietary investment products without considering what’s in their best interests – the worst examples of advice gone wrong were dredged up by the Hayne inquiry and are now sprawled out in explicit detail for the public to pick through.
Meanwhile, bold statements have been made.
Regulators, community leaders and industry advocates have been stepping forward in an attempt to turn around the toxic narrative.
ASIC, the agency responsible for regulation and oversight while this egregious activity was taking place, has said its findings in a 2016 report based on its fee-for-no-service investigation were validated by the royal commission’s findings.
ASIC chairman James Shipton couldn’t have been clearer regarding his view on commission payments when, in May, he told the Australian Council of Superannuation Investors Annual Conference in Sydney that, “The best way to deal with some conflicts is not to manage or disclose them, but to remove them altogether.”
Howard government treasurer Peter Costello appeared to be channeling the sentiment of the broader community in the immediate aftermath of the second round of royal commission hearings in a speech to the Centre for Independent Studies forum in May, saying all commissions associated with advice – of any kind – should be banned.
“From a public perception viewpoint, the message to come out of the royal commission is that advice models have created unsustainable conflicts that can’t be tolerated,” says Hillary Ray, a partner in Cowell Clarke’s financial services practice and former in-house council at ASIC. “The irreversible outcome of the royal commission is that community and political expectations [for the advice industry] have been raised.”
It’s crystal clear that the community and policymakers will now demand more from this industry. What’s not yet apparent is where community and political expectations will ultimately fall and what this will mean for future regulation and oversight.
Perhaps if the Future of Financial Advice (FoFA) regulations had drawn a more definitive line in the sand on commissions and vertical integration, a royal commission might never have been needed, many in and around the industry will speculate. But Financial Planning Association chief executive Dante De Gori interprets things differently.
De Gori’s view is that FoFA reforms have led the industry to a point where it’s now possible to set a hard date for a ban on grandfathered commissions; whereas five years ago, such a move would have been impossible to consider.
Indeed, grandfathering and banning of commissions has been an issue since the Ripoll inquiry, led by Former Labor senator and Parliamentary Secretary to the Treasurer Bernie Ripoll, as far back as 2009.
“I think anyone who thinks grandfathering should be definite needs to ask themselves, ‘ Why do you think that? Why do you think there is a right to grandfathering?’ ” De Gori comments. “We think there has to be a point in time when that transition [away from commissions on investment and superannuation] comes to an end…You’ve got to set [a time limit] because otherwise there will be planning businesses that won’t transition across when they should.”
The FPA’s view on banning grandfathered commissions is stated in its submissions to the royal commission – grandfathered commissions should no longer exist and advisers should be given a three-year transition period to get their houses in order.
A step too far
While the FPA’s views appears to be at least in the ballpark of public sentiment, they are quite at odds with other parts of the industry.
The Association of Financial Advisers, for one, outlines its reasons why banning grandfathered commissions is overreach.
The AFA argues that requiring advisers to move clients out of so-called legacy products could result in exit fees; moving clients to new products could crystalise capital gains tax; grandfathered Centrelink treatment of older pension products could be lost, resulting in the loss of the age pension or a reduction in pension benefits – all of these potential consequences work against the best-interests duty.
“Ideologically, I think people think commissions are bad, which is what’s shaping the debate around the issue at the moment, AFA chief executive Phil Kewin says. “If you are going to ban commissions, you have to ask yourself, ‘Is the reason you want to remove commissions to satisfy the public? Or is it to actually improve advice?’ What is the objective?”
The possibility of banning commissions on insurance products is not on the table – life insurance remuneration reforms are at a different stage, with capping of 60 per cent of the initial premium and 20 per cent of the ongoing commissions still within a three-year transition phase under the Life Insurance Framework legislation.
The AFA started out as a representative body for the insurance industry but has broadened its member base in recent years, in line with the trend of insurance advisers branching into superannuation and investment advice. Of its almost 4500 members, Kewin estimates only 30 per cent are focused purely on insurance.
In addition to the AFA, financial institutions have also made a stand against a blanket ban on grandfathered commissions despite public opinion on the topic.
Notably, AMP, the company at the centre of the fee-for-no-advice scandal in the royal commission hearings, has stated in its submissions that a removal of ongoing service arrangements could lead to advice becoming “less available, less tailored for the individual and less affordable”.
“If a customer is unhappy with the arrangements and services provided at any time, they can either renegotiate or terminate the arrangements without penalty,” AMP’s statement highlights, pointing to the opt-in requirements on new products brought in under FoFA.
AMP goes on in its submission to outline its rational for why grandfathering arrangements provided for in FoFA legislation should remain in place.
ANZ was the other notable institution rallying against a ban on grandfathered commissions in its royal commission submissions, suggesting that legislation terminating the grandfathering arrangements may encounter “constitutional difficulties”.
“In particular, legislation extinguishing contractual rights to ongoing commissions under pre-FoFA contracts may involve an acquisition of property on other than just terms,” the ANZ submission states.
Westpac-owned BT Financial Advice appears to have landed on the other side of the battle to ban grandfathered commissions to its competitors – in June, BT announced it would remove grandfathered commissions at the request of its clients.
In a statement BT outlines it will honour its contractual obligations to external financial advisers who are currently receiving grandfathered payments in respect of a BT financial product, but would assist these clients to make changes should they request the removal of grandfathered payments.
While this action by BT might not equate to an outright ban on grandfathered commission payments, it appears to be recognition of the general direction the political winds are shifting.
In a statement, Brad Cooper, CEO BT Financial Group, highlights that the introduction FoFA reforms in 2013 included a prospective ban on conflicted remuneration.
Five years on, more than 140,000 BT Advised customer accounts are still subject to these grandfathered payments, Cooper states.
“We have considered this position from both a customer and a stakeholder perspective and decided that it is the right time to draw a line under these past arrangements and eliminate them as far as we are contractually able,” he says.
The BT decision effects around 140,000 clients of BT advisers operating through the Westpac, St.George, Bank of Melbourne and BankSA networks. The financial impact of these changes would have represented $14 million of cash earnings in the first halve of this calendar year, the company estimates.
Clients or own interests?
In addition to consideration of the best interests of the client, ANZ and AMP certainly have strong commercial reasons for their stated views on the direction of the remuneration discussion.
Morgan Stanley equities analyst Daniel Toohey estimates that grandfathered commissions account for about 25 per cent of the revenue advisers in AMP’s wealth business generate. Toohey adds that it’s hard to measure the actual financial impact a ban on grandfathered commissions would have on a company such as AMP because of the complexity of the arrangements.
Meanwhile, ANZ recently sold its aligned dealer groups business to financial services provider IOOF but the terms of a distribution agreement with the two parties contain contingencies if the laws around product specifications change.
Rallying against a ban on grandfathered commissions could be a way for institutions to protect their commercial interests but, equally, allowing legacy commissions to continue could be justified based on the best interests of many clients. Maintaining the status quo on product remuneration could also help keep the cost of financial advice in check.
“What could banning commissions altogether do from a business perspective?” Cowell Clarke’s Ray asks. “What commission remuneration arrangements have [done is] allowed businesses – financial institutions – to put advisers on a base package and that has enabled these institutions to provide advice at a competitive price.
“In a post commission-world, if you are paying a fee, are you paying much more for advice?…You could be paying anywhere between $4000 and $10,000 for a bit of upfront advice…I’m sure the advice you get for this will be fantastic, but the real cost for advice in a post-commissions world could be higher than the appetite.”
Aside from removing existing institutionally sponsored funding models for advice, a blanket commission ban could also undermine the value of many advice practices that have been buying and selling themselves for decades based on the value of recurring income, says the executive director of wealth management M&A consultancy Chase Corporate Advisory, Greg Quinn.
Advice practices with a high proportion of commission-paying clients will see the value of their businesses fall should the royal commission report, expected to be tabled next February, recommend an end to grandfathered commissions.
“From where I’m sitting, a three-year transition period to a ban on grandfathered commissions could end up being a best-case scenario if you consider it’s possible, from the findings, that a retrospective ban of commissions is not entirely out of the question,” Quinn says. “Because there is so much uncertainty around commissions at the moment, a buyer might have a three-year transition period built into the terms of the deal and pay the seller for clients, paying commissions only once they’ve actually agreed to engage with the new owner for advice.”
Policymakers will probably need to ‘come to the party’ if the royal commission recommends a ban on grandfathered commissions by also ensuring some of the roadblocks preventing client portability are lifted, the FPA’s De Gori says.
Tax relief and quarantining for clients in asset-tested investment products might need to be considered as part of the commission ban, De Gori comments.
“Advisers are going to say, ‘I can’t transition these clients because the clients will be worse off, so that’s not right’… Research we’ve done shows an advice business can be transitioned from commissions to a fee-remuneration model in two years,” he says.
“There are instances where you remove clients from the product and you can’t stop the commissions from that product. In our view, that’s not OK. We think three years is enough time.”