While pressure from the broader community and the Hayne royal commission has pushed the big banks and AMP into ceding an end to grandfathered commissions, a high level of trail remuneration still in the advice ecosystem indicates reluctance in the wider advice community to follow suit.
A Professional Planner online poll has revealed that 42 per cent of advisers derive more than 15 per cent of their revenue from grandfathered commissions, highlighting the dependence that the advice industry still has on legacy revenue.
The poll results provide a snapshot of how heavily reliant the financial advice community is on trailing commissions, which were banned as part of the Future of Financial Advice reforms in 2013 but allowed to continue due to a grandfathering arrangement.
While 58 per cent of respondents said their practice received less than 15 per cent of their revenue from grandfathered commissions, a combined 42 per cent said they received either 15 to 25 per cent (18.5 per cent), 25 to 50 per cent (11.5 per cent) or over 50 per cent (12 per cent).
Grandfathered commissions have split the advice community between those who advocate a clean break and those who prefer either a continuation of the current arrangement or a more amenable, two to three-year cut-off period.
The Australian Securities and Investments Commission (ASIC) told the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that grandfathered commissions should cease “as soon as reasonably practicable and to the maximum extent possible”, which Commissioner Kenneth Hayne hinted at in his interim report when he said the question now is: “Why should the grandfathering provisions remain?”
The advice representative bodies did not take such hard lines; the Financial Planning Association advocated a “three-year transition period” in its submission to the royal commission, while the Association of Financial Advisers set itself apart by submitting a detailed refutation of a ban.
The AFA’s challenge centred on the notion that not all clients would be better off without grandfathered commissions, and that not enough research had been conducted to make such a move.
“There is a lack of understanding or research with respect to this issue,” the AFA’s submission read. “We would like to challenge the assumption that the continuing existence of grandfathered commissions is universally contrary to the best interests of clients.”
In this article, Professional Planner took a high-level view on the ‘battle of the ban’, where Hillary Ray, a partner in Cowell Clarke’s financial services practice and former in-house council at ASIC, pointed out that grandfathered commissions have gone a long way towards making advice affordable for more Australians.
“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,” she said.
Advisers themselves remain divided between ideology, commercial interests, the client’s best interests and community expectations. While advice practices may ideologically agree with banning commissions, commercial factors make the move problematic.
Liam Shorte, chief executive at Verante, said that while a ban on commissions is “just a matter of time”, consideration needs to be made for businesses that have taken out loans to purchase advice books containing trailing commissions.
Shorte said he believed a “firm taper” would be preferable to an immediate ban and says he has concerns about younger advisers who bought books of business over the last 3-5 years.
“Many could only afford to buy these books with C and D class clients that have low-value grandfathered commission books and were hoping to build a base from these books,” he said.
Asked if advisers might want to consider getting ahead of the agenda and dropping trailing commissions before it becomes mandatory, Shorte said that one of the biggest barriers is the cost of re-engineering clients into new products.
“While many would like to [pre-empt a ban on commissions], it may be too hard in terms of finding the time and resources to actually do the research, write the advice and implement it,” Shorte said.
Ultimately, if clients are well-placed and there is no mandated change, Shorte believes advisers will probably maintain the status quo.
“Advisers feel like they are being pulled in many directions at present and the priority must be to take care of their clients,” he said. “If they have fully disclosed arrangements and good relationships with the clients they may choose to wait.”
The point remains that advisers are still playing by the rules set out in FoFA. These guidelines haven’t been amended yet, and introducing new products that may disadvantage them and their clients is difficult to justify.
Paul Tynan, from Connect Financial Service Brokers, said advisers shouldn’t be making the move until compensation – for the adviser and the client – is broached.
“Some of these clients are in good products and should stay there, and taking them out will be a lose-lose situation,” he said. “Is Hayne going to compensate everyone? Is ASIC?”
Tynan said advisers shouldn’t be in any rush to pre-empt policy that he believes is inherently flawed.
“To say that all those products are bad and get rid of them holus-bolus is just a clumsy solution,” Tynan said.