The shake up of the advice industry continued this week as Westpac announced it has moved to remove grandfathered payments attributable to their BT advice products. The announcement said BT would honour its contractual obligations to external financial advisers who are currently receiving grandfathered payments in respect of a BT financial product. Industry players are choosing sides in the fight over grandfathered commissions which will affect not only adviser incomes, but their business valuations as well.
ASIC called for an end to grandfathered commissions in its submission to the Royal Commission in May, saying it encourages advisers to keep clients in legacy products instead of moving them onto better products. Five years after the FOFA reforms banned conflicted remuneration, grandfathered commissions continue to form a significant proportion of adviser remuneration. ‘Grandfathering’ simply means allowing old laws to continue on contracts that were entered into before the new laws came into effect. The grandfathering provisions end if you leave your adviser or switch your investments to a new product. The major banks are still paying billions every year in “conflicted” commissions that have been grandfathered. Westpac has been paying around $200 million per year since 2013 and at AMP, the majority of revenue being paid to financial planners came from grandfathered commissions.
The Royal Commission heard a case regarding a Westpac adviser who sold a nurse insurance policy’s she did not need but that earned the bank $30,000 in upfront and trail commissions in 2015, two years after federal changes that banned most commissions in the advice industry. The case was seen as emblematic of the problems regarding commissions more generally and increased pressure to deal with grandfathering.
The FPA also called for grandfathering to end in their submission to the RC, saying grandfathered commissions should no longer exist and advisers should be given a three-year transition period to get their houses in order.
The stance of Westpac, ASIC and the FPA could be said to fairly reflect public sentiment, which favours an end to grandfathering, though many in the industry are against any changes. The AFA has said that banning grandfathered commissions is overreach and outlined several negative aspect that could result from the ban, including exit fees and unfavourable outcomes from grandfathered Centrelink treatment of older pension products.
AMP have argued against a ban saying such a policy may lead to advice becoming “less available, less tailored for the individual and less affordable”, while ANZ has argued against the ban on legal grounds, saying terminating the grandfathering arrangements may encounter “constitutional difficulties”. Opposition to the ban from AMP is perhaps predictable, and emblematic of those sections of the industry that generate hefty portions of their turnover from grandfathered commissions. Morgan Stanley recently estimated that grandfathered commissions account for about 25 per cent of the revenue that advisers in AMP’s wealth business generate. It brings into sharp focus the questions of conflict of interest and whether advice given involving such products and contracts is in the best interest of the client, as required by law.
If all grandfathering were to end, in many cases it would mean substantial devaluations of practices and adviser books - something of particular concern for those advisers leaving the industry prior to new educational and qualification standards coming into force in the next few years.
In April, the head of Westpac's BT financial advice, Michael Wright said it would be "complicated" to remove grandfathered commission payments being made to financial advisers. Out lining what could be described as “first mover dis-advantage”, Wright explained; "The challenge for us is if an organisation stopped paying grandfathered commissions, the reality is it would put themselves at a very significant competitive disadvantage," He continued "the commissions being received by dealer groups would stop, and that would have significant brand damage on that product provider and their ability to provide advice."
Westpac’s announcement this week may indicate the worm has turned and that they are prepared to wear the potential “brand damage” from the industry. The announcement will no doubt add weight to the argument for a future ban and may signal the beginning of the end of the grandfathering practice.
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Comments24
"The older style products are fading away at a reasonable rate due to the passage of time. For example if a client moves from super to allocated pension on retirement the new fund is not allowed to have commissions. Why all this heat about an issue that will solve itself with a little patience? Mark"
mark 08:44 on 22 Jun 18
"This article is factually WRONG! How can an outfit like Adviser Ratings not understand "grandfathering"? The first comment from "Stupid Article" is correct as there are NO grandfathered "commissions only grandfathered clients in relation to investment/super/pensions only. ALL clients received an FDS under FOFA reforms where fees are charged for services rendered. And to use an insurance example to help illustrate their writers point????? MY GOD this person who wrote this is clueless! "
Brad 17:51 on 21 Jun 18
"Massive flaws in this article. What are grandfather commissions? There is no such thing. clients who don't have to be given an Opt-In are considered grandfather, or termed a grandfather client. The ongoing fee received is not grandfathered. The debate arose out of ongoing fees being received for no service. This again has nothing to do with grandfathering. If a client is grandfathered, you still have to provide the service for which you originally received the fee for, its ongoing. If you have taken over someone else book, you have to continue their promised service for the fee received. The article uses an insurance example which is one of few only remaining product you can receive a commission on. This commission is mostly upfront and very small portion is ongoing. By not paying out these commissions, these big fund manager companies will have more funds under management and their own fees will increase accordingly, so BT feather their own nest in a way. "
Stupid Article 16:41 on 21 Jun 18
"Grandfathered trails commissions have been in force for many years and should remain. All of this FOFA and LIF et al is simply a smokescreen from the banks and big insurers to regain control of the financial services industry. They felt this control was in the hands of advisers and so came up with, first of all, churn to right their ship. Now it's completely changed this once-great industry. It's no longer viable for many, especially life-risk advisers, to keep their doors open. With a mountain of duplicated compliance and massive follow-up because internal staff have abdicated their responsibilities in this, advisers don't have time to see clients or seek new business anymore. So what about the underinsured public? This was the pretext initially put forth by legislators who simply danced to the tune of the big end of town who raised the clamour. The government can’t be pleased with itself in what it’s done to the dairy industry, the taxi industry and now the latest victim, the financial services industry. "
Paul Herring 16:18 on 21 Jun 18
"This is a cynical move by BT and it should be called out for the marketing nonsense that is. BT is the product manufacturer and uses it own employed advisers and external advisers to service those legacy clients. In turning off the payment to the employed advisers (because it owns the client relationship), all they are really saying is "these clients get no more service". You can bet that BT have run the numbers and decided that all they are really losing is the smallest, oldest clients, that the commission lost is minimal in the bigger scheme of things and it means that their existing (overwhelmed) staff can focus on bigger clients. What would have been much fairer is to let clients decide what they want. There is only one real pathway here. Commissions on grandfathered funds need to be disclosed to the client, either voluntarily, or change the law to mandate inclusion in the FDS regime. That way, the client knows if someone is being paid $1 a year or $1000 a year to look after them, and can demand an appropriate level of care and service. Transparency will fix this issue, not more profit making cynicism from banks."
Grant Simpson 16:00 on 21 Jun 18
"Perhaps if the commission is rebated to the client and the adviser charges a fee that solves the problem of conflicted rem, grandfathered pensions, no trigger for CGT and adviser book valuations. At the same time (if circumstances permit) take it as an opportunity to upgrade products , upgrade offering and...increase your fees. "
RD 15:46 on 21 Jun 18
"Assuming that all clients receive no service from their adviser is factually incorrect. A few bad apples do not define every advice relationship. The trailing commission was introduced to compensate advisers for the advice and ongoing service they provide clients. The reality is that the big super funds are institutions that provide bureaucratic treatment to account holders according to their account number. It is the advisers that provide the personalised advice and service to their clients. If markets did not move and clients did not worry, if all clients were entitled to the full age pension and paid no tax, legislation was never tampered with and clients never had a marriage break down or died and didn't have children who need to save to purchase a home and children to protect in the event of misadventure or parents who don't get old and sick and need aged care and help with wills and powers of attorneys then maybe we could do without the need for the support of advisers. Until then please stop the adviser bashing. "
John Smith 15:44 on 21 Jun 18
"For those of us that have borrowed to buy a business the loss of what was a sizeable part of my business income (about 20%) could have an affect on the continuity of my business. Should the bank call in the loan due to this loss in revenue it would be very disappointing as well as financially ruining what I have spent the last 18 years working towards. One option might be that rather than ban the payment altogether, make trail commission (including insurance) apply to the Fee Disclosure Regime. The clients can then choose to continue to have them paid or not."
Geoff 15:39 on 21 Jun 18
"Westpac are not the first to move on grandfathered commissions. I managed (recently sold my business due to health reasons) a number of employer super plans under Colonial FirstChoice. A year or so ago they wrote to all members of these funds requesting a signed form back from members that stated they had made an investment decision - not just into a default MySuper option - in order to continue to pay a Plan Service Fee to me, the adviser. As I had helped most of these plan members with their investment decision, nominated beneficiaries, etc. (back pre-Cooper review when we could be fairly remunerated for the time it took to do this sort of work) most of these members went to the trouble of completing the said form and returning it to Colonial. Despite assurances from Colonial that these fees were not 'conflicted' and able to the paid - Colonial made the arbitrary decision around Christmas last year (love the timing!) to cease paying these fees. Their reasoning - only a handful of advisers were being paid these legitimate fees so they could turn them off and not have to worry about industry back-lash. When I went to sell my business, this decision by Colonial cost me in the vicinity of $50,000. As the RC is showing - the real, systemic problems in the financial advice sector are the result of the practices of the banks and large institutions. Despite that, advisers are still the 'whipping boy'. How about compensating those advisers for the grandfathered remuneration (it's not like the banks aren't making record profits) and take over the advice of these products themselves? Of course, that would a fair outcome and one thing is for sure - banks aren't interested in fair. "
Jason 15:38 on 21 Jun 18
"Westpac and BT can turn off the commissions but we all know who benefits out of that, NOT the client, Not the advisor but Westpac & BT. This great industry is going down the tube because of these knee jerk decisions. Will someone wake up, like the FPA and step in to take charge of this mess. "
GJM 15:29 on 21 Jun 18
"Bob - why are you defending dud advice? From the linked article - The RC found re insurance: "the client agreed to pay more than $30,000 for an insurance policy THEY WOULD NEVER USE". XXX Michael Wright, head of Westpac's BT Financial, conceded the bank gave "poor advice". XXX the case went to FOS - went to the Financial Services Ombudsman, who found the bank should pay $47,413 for losses on the sale of the family home and that $60,051 be returned to two super funds, one Hesta and the other CBUS. Muppet. "
Hey Bob! 15:28 on 21 Jun 18
"Terrible article using an insurance commission in this context. Suggests the author is unable to discern the difference. Therefore they perhaps should not be making ill-informed comment. Anyone calling for the ban and using Best Interest Duties as a reason is illustrating their gross incompetence of the issues as to why many clients are in fact better off retaining their old grandfathered product or are unable to change. So let me enlighten you... For clients with Unit Trusts where there are unrealised Capital Gains. For any client in an assets test exempt pension For any client in a term allocated pension For many clients with an account based pension under the old centrelink income rules For superfund clients with health issues where their insurance is connected to their super & cannot be switched For most clients where the adviser has been upfront about the trail commission & used it as an offset to adviser service fees. For superannuation accounts in accumulation phase with unrealised captial gains. If you can't understand these examples, YOU shouldn't be in the industry, either as a commentator, regulator & especially as an adviser!"
Michael C 15:26 on 21 Jun 18
"Why not just shoot us now? We have been getting hammered for years"
Greg 15:23 on 21 Jun 18
"If only it were that simple. There are many honest advice businesses that do provide ongoing advice to clients in legacy products and therefore, need to be remunerated in one way or another for their time. Perhaps a less black and white solution: if you continue to accept grandfathered commissions for each client over a certain $$ pa, you must do a review each year. A blanket ban is going to put a lot of advice practices out of businesses and staff out of jobs. The advice sector has suffered blow after blow because of some bad seeds. Stop painting us all with the same brush!! "
Margaret 15:22 on 21 Jun 18
"Unhappy - are you referencing Peter Johnston and the AIOFP. They do not represent us or the consumers interests. They have no idea what ethics and quality financial advice means."
Jeffrey 15:08 on 21 Jun 18
"I have a simple solution, buy (back) the book of grandfathered commissions back from the advisers, this will have the effect of 1. providing "real" compensation for the capital value we will lose if grandfathered commissions are banned and 2. allow the adviser to either retire debt of cash up for further acquisition. mind you there was no rush to do any similar when this kind of issue raised its head once before, so I'm unlikely to get a phone call anytime soon with such an offer. PS, in my particular case i would have very little by way of grandfathered commissions, so I do not have an axe to grind here"
GPH 15:06 on 21 Jun 18
"What’s insurance commissions got to do with this? We’re talking about investment commissions. "
David Hamilton 15:02 on 21 Jun 18
"That would be the end of financial planning. There will only be employed planners from the big groups. People will be under or not insured and super fund balances will reduce. The cost of welfare for the government will go through the roof!! All because advice will be to costly. I have clients now not wanting to pay for SOA's."
Darran W 15:02 on 21 Jun 18
"Jessica and Graham. Before you bang on your high horse about banning grandfathering commissions go and have a chat to long term planners like myself who have legacy businesses which pay trailing commissions. Yes you have appoint; some planners sit on their grandfathered book and collect the trails but most , especially those like myself who have a large retiree client base have client stuck in these products because they are centrelink income test Grandfathered and cant be moved. We provide no less service to those many clients we have fee for service arrangements and in some cases more. I can show you dozens of grandfathered commission based clients who get regular reviews, Centrelink help and a myriad of other services. This simplistic idea that commissions are an inherent conflict of interest is absolute rubbish and insulting to those of us who work bloody hard to look after their clients. A simple solution; introduce compulsory AFDS for commissions as well. Not hard. But its typical of some just to want to BAN things because they hold some sort of moral high ground. "
chris Todd 14:57 on 21 Jun 18
"Re The Westpac Adviser who sold an Insurance policy to a nurse and has received initial and renewal commissions .Is it your opinion she does not need it ?(what would you know ) that is your opinion... and insurance commissions like this case has nothing to do with grandfathered commissions... so get your facts right!! BD"
Bob 14:56 on 21 Jun 18
"Ending grandfathered commissions is not simply switching off payments. When FoFA came in grandfathered commissions were allowed because the Australian Constitution protects private property. Compensation would have been payable to all advisers by the Australian Government. Apparently the Commonwealth Government Solicitor General confirmed this in legal advice to the then Minister Bill Shorten. That's why the ban was prospective. In the last 5 years advisers have bought businesses, borrowed money, employed staff and leased premises on the basis there was certainty under the law. Are we going to end up like the Victorian Taxi Drivers who lost their livelihood recently?"
Daryl La' Brooy 14:55 on 21 Jun 18
"Great article - ridiculous excuses from the banking industry as to why they are STILL protecting grandfathered commissions 5 YEARS after FOFA. Australian consumers deserve better."
Jessica A 14:47 on 21 Jun 18
"About time - hopefully the rest of the product providers will end this absurd conflict of interest as well."
Grahame H 14:30 on 21 Jun 18
"I'd have to agree with Peter Johnstone, this ban will just do a big fat favour to the big end of town by squeezing independent advisers of commission and forcing them out of the industry. The remaining players (who cross subsidise their advisers) can then hoover up the cheapened adviser books and company that can't survive and further consolidate their grip. The banks won't have to pay commissions and the advisers will bear the cost in the form of increased fees for clients. Banks get to look good and pay less - a win, win for them!"
Unhappy 14:29 on 21 Jun 18