Despite the broader movement to ban legacy commissions in the wake of the Hayne royal commission, AMP advisers have thrown their weight behind the company’s bid to retain them, saying a blanket ban could push clients into inappropriate product choices and lead to a reduction in clients under advice.
Banning legacy commissions would also lead to peripheral costs for advisers and sharp reductions in the value of advice practices and linked buyer of last resort (BoLR) agreements, the AMP advisers have said.
Selina Fong, a principal at Wealth Protection Advisers – a firm licensed by AMP’s Charter Financial Planning – explained that many of her clients with older products are better off because they are cheaper.
“It also means they have someone to look after them,” Fong said. “They might not want to stay under advice if they have to move to a more expensive product.”
Another adviser, licensed by AMP’s Hillross Financial Services, said “some of my clients will have massive capital gains issues if they switch products”.
The adviser, who wished to remain anonymous, explained that allocated pensions, investment products and managed funds were the most common examples of where a client could lose out by switching to a newer, comparable product and fee arrangement.
“You’re not looking at best-interests [duty] then,” he said. “Even if you do change them to a better product, there can be so many peripheral issues around it that could hurt them.”
Requesting a slower transition
Professional Planner canvassed opinions of AMP advisers following AMP’s response to round 5 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which included a carefully worded rebuttal of the move to end the conflicted commissions that were grandfathered out of the Future of Financial Advice (FoFA) reforms in 2014.
In the submitted response, AMP stated it agreed with Treasury and ASIC that there were “constitutional issues” involved with the proposed ban, and that advisers own the revenue streams that are under threat.
“Note that legislative measures to remove grandfathered commissions risk extinguishing the property rights of existing contracts,” AMP stated.
The submission echoed Treasury’s concerns that the removal of grandfathered commissions “was not straightforward and could negatively impact the viability of some financial advice practices, with implications for their owners, employees and customers”.
Instead, AMP supported a slower transition away from legacy income streams that included government support for capital gains tax relief, which is seen as one of the major impediments to transferring clients to new products while still meeting best-interests duty.
The movement against legacy commissions has gathered steam since the royal commission uncovered widespread conflicts and evidence of malfeasance in the advice industry. All four of the big banks have indicated at least some support for an end to grandfathered commissions, as has the regulator.
AMP is not alone, though; the Association of Financial Advisers (AFA) also defended grandfathered commissions in its submission to the royal commission. AFA general manager of policy and professionalism, Phil Anderson, stated that “we do not believe that sufficient work has been done on this issue to establish an informed debate”.
While Anderson acknowledged that one of the aims of FoFA was to get rid of commissions, he said it couldn’t be at the expense of consumers.
“Ideologically, and certainly in the long term, these products should disappear,” Anderson said. “But until it’s in the best interest of the client, they shouldn’t be forced to move.”
AMP’s BoLR arrangements, while varied, generally mean it retains the right to purchase the business if an adviser wishes to sell up. If grandfathered commissions were cut, a flood of advisers would be expected to trigger these agreements, putting pressure on AMP to come up with enough capital to facilitate the deals.
For AMP advisers, it would also wipe significant value off their businesses. While many grandfathered fees would be replaced by new product fees, the shift would probably be a trigger for many clients to leave the adviser.
Neil Macdonald, chief executive of the AMP Financial Planners Association – which represents about 1700 advisers under the AMP Financial Planning and Hillross licences – said the issue was “a complex problem”, with no “simple answers”.
Macdonald said the proposal’s peripheral costs to the client had not really been assessed.
“It’s not just capital gains tax,” he said. “High exit fees can also be an issue. Plus, a lot of these [products] are for small amounts, and the cost of advice to move them may exceed the benefit of moving them.”
There would also be administration and implementation costs for advisers.
“You’ve got to do a Statement of Advice for every client,” the Hillross-licensed adviser said. “At $600 to $800 a pop, who’s going to pay for that?”
Don’t punish advisers for doing the right thing
Steve Prendeville, managing director of business broker Forte Asset Solutions, said part of AMP’s motivation in rejecting a hard cut to grandfathered commissions was to “build back trust and confidence from its advisers”.
Many planners had resisted the option of switching clients over to more expensive products, he said, because “the old products are often the most effective mechanism for many clients”.
“Switching over is often punishing the adviser for doing the right thing,” he said.
Paul Tynan, chief executive at Connect Financial Services, agreed.
“Everyone thinks advisers are doing the wrong thing here,” Tynan said. “But they could have dialled their fees up years ago and switched them over.”
Prendeville isn’t a fan of AMP in general but believes it might be on the right side of this argument.
“I find myself in the uncomfortable position of agreeing with AMP,” Prendeville says. “Even worse, [it seems] to be morally and ethically correct.”