Licensees are reporting vastly different recruitment experiences in the first month of the Future of Financial Advice reforms with some recording high levels of query from advisers looking to switch while others claim it is now harder than ever to move.
Last week, Futuro managing director Dennis Bashford said the dealer group was experiencing a significant spike in enquiries from planners. At lease ten are expected to join in the next month.
Premium Wealth Management CEO Paul Harding-Davis agreed that there has been an unexpected level of query, adding that in many cases advisers felt compelled to at least test the waters.
“We do keep hearing stories of advisers who are only just getting training and guidance on FoFA now, and or inadequate support,” he told Professional Planner. “No doubt they are concerned, if not frustrated and alarmed.”
The Encore Group national practice development manager Matt Fogarty (right) said there had been a lot of talk in the recruitment market in April, May and June with still plenty of activity in the sector.
He expects a period of consolidation ahead of some “big plays” next year.
Commission conundrum
However some advisers face a different set of difficulties with one expert claiming that those holding on to legacy books and resisting a fee-for-service model could be locked into their licensee’s dealership for life.
M&A Consultancy firm, Radar Results, has received advice that some authorised representatives who wish to sell their commission-based financial planning investment clients outside their existing dealership may lose their commission-based revenue.
“Even if that AR wants to move from one licensee to another solely to receive a lower dealer-service-fee arrangement or some other benefit, then the grandfathering exemption will disappear,” said Radar Results principal John Birt.
“After moving to a new licensee, the clients will be treated as ‘new clients’ with a Financial Disclosure Statement (FDS) required within one year and opt-in will start in the second year.”
Asked for a legal view, Claire Wivell Plater, managing director of The Fold Legal, said commission on investment amounts are conflicted remuneration and, for grandfathering to apply, the arrangements under which the payments are made must have been in place as at June 30 2013.
“Where an adviser practice is being paid grandfathered commissions, these commissions are paid under a ‘distribution’ agreement between their current licensee and the product provider and then passed through to the adviser pursuant to the authorised representative agreement between the licensee and the adviser,” she said.
“When advisers move to a new licensee, a new arrangement needs to be created for the licensee to pass remuneration received from product providers for business written by that adviser to the adviser.”
Grandfathering: unintended consequences?
After July 1 2013, such new arrangements are not grandfathered, so the new licensee cannot receive or pass on the commissions to the adviser.
According to Wivell Plater (left), a similar problem occurs when a portfolio of clients is sold to by an adviser authorised by one AFS licensee to an adviser who is authorised by a different licensee.
“The old licensee can continue to receive them the grandfathered commission – they could continue to pass the remuneration on to the adviser – but will they do so?” she asked.
“Most licensees require outgoing advisers and the new licensee to sign a transfer agreement. Usually those agreements establish a finite period during which the outgoing licensee will remit remuneration to the outgoing adviser, e.g. 90 days.
“If the new licensee already had arrangements in place with the product providers, they could receive the commissions – but could not pass them on to the adviser.”
Both the Financial Planning Association and the Association of Financial Advisers have made submissions to Treasury seeking a resolution of this issue.
“It does seem to be an unintended consequence in that it effectively penalises and hampers the commercial flexibility of advisers who want or need to change licensees and sell or buy client portfolios,” says Wivell Plater.
Acquisition impact
Birt believes some urgency is required in resolving this matter as the value of particular financial planning businesses may be affected by this side-effect of the legislation, particularly if they can be sold only within their own licensee group.
“This could limit the number of potential buyers for that business. It’s a supply and demand scenario and with a lot fewer buyers, the price will be affected adversely,” he said.
“In some boutique licensee groups where there’s only a handful of ARs, there may be no buyers at all for that client register.”
On the ground this is already starting to have consequences.
“For any established practice which likely has revenue from products like Master Trusts which had imbedded commissions etc. they will be unlikely to give it up in the short to medium term,” said Harding-Davis (right).
“I’ve spoken to a couple. It is likely also to impact on the acquisition of a practice outside the dealer group. It has already done so for one firm I know that was making an acquisition of a client book.
“In my opinion it won’t be for life – but until they work through those clients over a couple of years and transition them to different models.”
