As the lead up to the January 1, 2021 grandfathered commissions cull draws closer, advisers are coming under increasing pressure to get ahead of the end date and extricate conflicted remuneration from their books as soon as possible.
Rumours that CFS is mulling an end to legacy commissions for its advisers six month before the deadline, on June 30, could put pressure on other institutional providers to follow suit.
According to Sue Viskovic, founder and managing director of Elixir Consulting, the tenor of conversation coming from regulators and product providers is such that the deadline is no longer a guide, but “the very end date” for every cent of commission to be excised.
Practices are also concerned that if product providers get in before them and switch off commissions, the notices they send to clients is likely to show them in poor light.
“The language that will be coming in the notifications from fund managers probably won’t be all that glowing of the advisers,” Viskovic warns. “It’s far better that the adviser takes a little bit more charge of the rhetoric and the sentiment of what’s happening.”
Increasingly, advisers are approaching product providers directly and asking for commissions to be switched off.
“We’ve got quite a few advisers that have been doing that once they get to a point of realising it may be a bit of a liability,” she reveals, adding that from a commercial standpoint commissions often represent only a small percentage of revenue.
Getting under the hood
For practices confronted with the task of unbundling grandfathered commissions, Viskovic identifies three revenue streams that may need to be addressed.
The first and most common is grandfathered trail on old investment products. Often, the product provider will switch off these fees before the adviser is aware, Viskovic says. The result is a declining revenue, sans data on which clients have been switched off, plus the disconcerting possibility that notices have been sent directly to the client.
The second stream relates to volume bonuses, though these are often paid directly to licensees. She warns, however, that the repeal of these could end up adding to the cost burden for advisers, as dealer groups have used them to subsidise fees in the past.
Viskovic says this uplift has been on the cards for a while, but will filter down in a variety of ways.
“There’s a bit of a mix,” Viskovic explains. “Some licensees are just saying that the fees go from here to here and it kicks in on this date. Some are saying fees will go up but they’re undertaking a project on it and will deal with it later, while others are saying they’ll split the increase and apply it over a period of time – 50 per cent now and the balance of the uplift on a future date.”
The third revenue stream that may be affected pertains to ongoing fees collected from clients who signed onto a fee arrangement prior to 2013; that is, before the Future of Financial Advice reforms that require clients to opt-in every two years.
It’s a separate issue to grandfathered commissions, Viskovic explains, but “in the same bucket” because these clients will need to opt-in to new annual ongoing service agreement rules.
“Those clients may have been on an ongoing fee for a significant period of time and haven’t been as engaged as other clients who have actively participated in their reviews and recognise the value their advisers provide,” she adds.
Reset and refresh
Viskovic reckons the silver lining for businesses wrestling with the commissions ban is that it gives them an opportunity to reshape the way they charge clients.
“Every business we’ve worked with has taken the opportunity to refresh and improve,” she says.
Addressing remuneration often leads to a healthy audit of the entire business model, Viskovic adds.
“We see many businesses that start by considering pricing, but the minute you start looking at the cost to serve and the appropriate pricing model the next question is: ‘well, what are we actually delivering for our fees? How do we get more efficient and deliver a better client experience?”
This can lead to an evolution that could take a practice in a number of directions, “whether it be the way they conduct their conversations, the tools they leverage from or expanding on the areas of advice like estate planning.”
The going will be tough for some, but Viskovic reckons this may pave the way for others.
“As bad as it is for advisers not leaving the industry on their own terms, the opportunities are significant for those who can improve their business.”