There has been a lot of discussion and speculation about the ending of grandfathering for clients already receiving advice prior to the introduction of FOFA in 2014 and the subsequent abolition of commissions for investment advice. This commentary has typically focused on the impact on cash flows and valuations for the affected advice businesses, and how they will need to reorient their business models to fee-for-service, in some cases simply to stay in business. However, but there are a raft of other consequences to this action.
If this change is to be legislated, as we expect it will, there needs to be a reasonable transition period to allow an orderly process for advice groups to change to ensure their sustainability while also minimising any related client attrition that may occur as clients are confronted with an overt fee-for-service proposition, in some cases for the first time.
Other Consequences
However, there may be unintended consequences from ending grandfathering, specifically with investment products that have traditionally paid fees to advisers for recommending the product or to platforms and licensees for inclusion in menus and approved product lists (APLs).
By definition these products have origins pre-FOFA introduction in 2014 and in many cases are much older legacy products with management fees, features and performance that do not warrant being included in contemporary platform menus, APLs or even model portfolios. Will these legacy products stand scrutiny when compared against the latest and greatest offerings, when grandfathered fees are removed? And if this change leads to an overall renovation of menus and APLs, what does this unwinding process look like?
One challenge is that many of these products have been sold to clients through master funds and master trusts. In these situations, transfer of clients from a legacy product to a contemporary product would catalyse a potentially unsavoury CGT event, although the benefits of moving to a more contemporary, better rated fund may outweigh the total cost considerations including tax impact in the long-term.
But let's keep exploring this scenario.
In this situation, are the advisers likely to recommend clients stay with the same fund manager or will they switch managers? And while it probably shouldn't, will it catalyse a modification of their asset allocation at the same time? And lastly, once extracted from the master trust, will advisers recommend they switch platforms or move off-platform into managed accounts or SMSF structures?
There is also the question of potential compensation for advisers. As one adviser has mentioned in commenting on the issue:
"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.
There is also the question of cost borne by the wider advice industry, including product manufacturers who would be forced to close or renovate products.
What about the potential for special treatment for sections of the industry or tax concessions for individuals facing CGT issues brought on by any legislative changes? Or a time frame for the full transition?
The bottom line is that the end-to-grandfathering debate is far more than simply a discussion about the future of financial advice businesses, but may have profound impacts on the entire investment product marketplace and distribution framework.
We’d love to know what advisers think about these issues. We expect grandfathering will eventually cease – the question is how and when.
Comments24
"I find most of the comments troubling. If trail commissions are to be scrapped then one would assume those costs are rebated to clients - certainly CFS FirstChoice do this so it can be done. If you have a strong relationship with your client then you simply turn of trail and charge a ASF. This negates CGT and CentreLink issues with account based pensions. My client book contained fixed fee, % based fee and trail. I decided sometime ago to where not possible to rebate trail and charge ASF. All clients agreed because I had a relationship with those clients. I didn't have 2,000 "clients" on my books lets be real here the reason trail books where being bought and sold at 3 and 4 times was let them sit on your register for 3 years and make cash. Is it any reason why 30% of Australians seek advice image 30% of us only saw our doctor or dentist. All I hear is what a good job I do for my clients how much they appreciate my advice well if thats true remove the trail and charge the client in a transparent manner. "
Unsure 08:38 on 13 Sep 18
"A different view - if you have watched the news, listened to the radio or read a newspaper in print or online you can't have missed what has been going on in our industry. As a client of an adviser who wasn't servicing you or if you thought your fees were too high wouldn't you look around elsewhere? Are we treating clients as sheep that can't think for themselves or removing any accountability to themselves for their own financial well being? It's another example of passing the buck and an excuse for various parties to push their own agendas. All my clients are already OSF but it is BS, it really is. Disgraceful bullying, discrimination, selective targeting, unconstitutional, un-Australian and a continually vindictive assassination of our adviser industry comprising ordinary australian mums and dads who are head down bum up working in their businesses without the time or resources to do anything about it until its too late. Sad and tragic when I have to turn away a lovely and genuine fee paying client because they don't have enough money to get financial advice like I did this week and I was the second one that turned them away. Felt like a complete AH even though I spent an hour and half with them for free so they didn't get burnt doing I themselves. Fricking travesty."
Paul 14:48 on 20 Aug 18
"Do we have numbers on clients that are pre fofa with trailing commissions? From my experience the trail is nothing compared to the fees you can generate from new advice. Also the grandfathering of income streams I don't believe would impact that many clients because most I see are impacted from the assets test. We are probably all generalising because we don't have data on how many clients are pre fofa of them that are on income streams and what there balances are and what trail is actually paid "
Will Hurst 09:14 on 18 Aug 18
"Don't ban commissions just make every client FDS and Opt In even if it is trail. That way the adviser has the obligation to service the client or turn the fee off. It is not simple as just moving the product due to CGT, exit costs, group insurance that the client may not be able to get elsewhere etc. Things have changed and advisers need to adapt. Gone are the days of having 400 clients. The new model is having 120-180 max good fee paying clients who are engaged with their adviser and know what they are paying. Anymore than this and you will struggle to service them. "
Some bloke 10:24 on 17 Aug 18
"Reading some of these comments from individuals keen to see the end of trail commissions seem to me to be missing the point. The Royal Commission uncovered the fact that advisers weren't reviewing clients on an OFA. Under FOFA every adviser should know what is required to meet their Best Interest Obligations. Products that pay trail commissions will disappear over time. There's no need for these individuals advocating the removal of trail commissions to worry. Instead make sure you service your clients whether they're on an OFA or trail commission. I certainly do. "
Maurice 09:59 on 17 Aug 18
"With respect to the older clients in account based pensions and on Centrelink prior to both 1 July 2013 and the govt changes to the Centrelink assessments in 2017 these clients will lose their Centrelink benefits they currently have if they are moved out of their existing products to a new contract. Clients Best Interests? The CGT issues need to be addressed as many of these folk have been in their product for many years. Clearly the advice is about their total situation, not just about their product as an income stream. Most of the trail commission is decreasing as the older folk use up their incomes streams and within a few years most of that form of income will disappear. Trail income on investment products as a total source is small compared with fee for service ongoing income. If you have a comment feel free to identify yourself...."
Philippa 07:30 on 17 Aug 18
"The CGT argument is pathetic. The vast vast vast majority of Aussies will be better off not paying bs fees for next to nothing. These sort of products are the things that give financial advice a bad name. I have some sympathy for people that borrowed to build a “business” around acquiring client books and hold debt. But at the end of the day these advisers were getting a 30% annual return, then turn around and complained when the gravy train is under threat. I liken this to the taxi drivers complaining about the fair market coming in through Uber. In my opinion the product companies should be mandated to allow all clients in grandfathered products to move to an equivalent with no CGT implications. Honestly, do we care more about financial advice businesses, or financial advice as a way to ACTUALLY help people. "
Ben Nash 22:14 on 16 Aug 18
"Maurice, if you borrowed to buy a book of commissions in the last few years believing that commissions would never be banned, it doesn't say much about your foresight. Investment products with commissions were outdated well before FOFA came in. Arguments against removing grandfathering are disingenuous. "
Guess 21:42 on 16 Aug 18
"Get rid of them and pay the advisers out 3 times reoccuring revenue based on the balance at the time of removing them. Pay this as a lump sum, paid from the product providers and if the clients are moved within a three year period, the goverment pays back the pro-rata of the trail commission pay out. Incentivises advisers to change the clients to a cheaper product and means that property has been taken "on just terms""
Andrew 21:30 on 16 Aug 18
"Sadly, this proposal is being aimed at that 'vintage' of financial advisor who decided to remain in the industry during the GFC and help navigate their clients through difficult times. The same advisors who chose to bite the bullet and adapt to FOFA, further their education, embrace new technologies to improve their services, and in many cases, took a risk to build their businesses via acquisitions. And as we all know, they are now facing a closed-book exam and additional degree-level courses. To now treat these advisors as merely 'collateral damage' in the drive to 'clean-up' the industry strikes me as utterly cruel and unfair. "
Rick 18:52 on 16 Aug 18
"Maurice, the problem is that the trail commissions generally come from older more expensive products. The issue is why are clients not being switched into cheaper ones that now exist. The conflict for advisers is they lose the trails. If you are confident you are delivering services to clients, then you should not fear moving the client to a cheaper product, negotiating a fee equivalent to the trail, that can come from the product cash account. FOFA requires avoiding or doing what is possible to mitigate conflict. This is clearly avoidable, if the client is serviced and agrees, and there is no reason they won't, as they are better off in most cases excepting CGT, exit fees or Centrelink grandfathering."
Phil 17:49 on 16 Aug 18
"Three issues: one is sovereign risk. Banning something that has been grandfathered is a significant risk. Shall be ban CGT exemption for assets purchased prior to 20 September 1985, and if not, why not? The only recourse is to seek compensation from the government. Secondly, I cannot understand this issue about trails being the source of all evil. It is well known - it was well know to ASIC, it was well known to Labor when FOFA was formulated - that Storm Financial rebated all trails. It was in fact that lack on ongoing revenue that "allowed" Storm advisers to deny any ongoing relationship with their clients, that exacerbated the magnitude of the margin calls when they occurred. Lastly, what is going to happen to the trail: is it going to be refunded to the clients? I can't see that happening. More likely, the fund managers will keep it (they quoted the fees in the PDS that the client is paying, after all). How is this benefiting the client?"
not saying 17:33 on 16 Aug 18
"yes too bad if you bought a book of clients!! on trail commissions on the basis that these clients as was promised are and will remain grandfathered! where is compensation for that!!!! lol "
not saying 17:10 on 16 Aug 18
"There are lots of great points here in regards to keeping commissions and sympathy should be shown to those that will be adversely impacted. But the reality is we have come too far now and the only solution is to take a measure which some may say is extreme - just rip the band aid off. We are a resilient species, issues or not we will find a way to make it work and at the same time maybe save some face with the public given all the disgusting practises of many of our predecessors. Not to mention it may force advisors to take a leap of faith and learn how to demonstrate the value they charge in order to justify a true fee for service and not take the easy route of a commission."
Chronos Private 16:59 on 16 Aug 18
"Maurice, the problem is that the trail commissions generally come from older more expensive products. The issue is why are clients not being switched into cheaper ones that now exist. The conflict for advisers is they lose the trails. If you are confident you are delivering services to clients, then you should not fear moving the client to a cheaper product, negotiating a fee equivalent to the trail, that can come from the product cash account. FOFA requires avoiding or doing what is possible to mitigate conflict. This is clearly avoidable, if the client is serviced and agrees, and there is no reason they won't, as they are better off in most cases excepting CGT, exit fees or Centrelink grandfathering."
Phil 16:54 on 16 Aug 18
"There will be substantial direct and indirect consequences for all Australians and the Federal Government, if Grandfathering ends. For Practice owners who employ advisers and Admin staff, the Grandfathered revenue helps pay for the large outgoings, including the high Salaries that the Federal Government reaps Billions of dollars in PAYG Tax receipts from. There seems to be a misconception that Grandfathered revenues are a pot of gold that is all taken by the owners for their personal consumption. Maybe I missed something, though in the 31 years I have been in Business, I have not been able to see, let alone grab that pot of gold, as my Business expenses, which includes paying my employees salaries and the high cost of compliance / ongoing training and minor details like bills that must be paid to keep the doors open, seem to have drained the pot dry before I could get a look in. As for flicking off the switch and expecting all our clients to immediately take up with enthusiasm, having to find another out of pocket expense, along with all their other outgoings, is a bit like the South Australia Power experiment that was so successful, the entire State was thrown into Chaos and darkness on more than one occasion. Beware of what you wish for. The real world is a vastly different world to the guru's version and should be treated with caution. The real world impact of an end to Grandfathered revenue for many practices, will be a disappearance of revenue, followed by fewer staff and less Tax revenue to pay for all the Interest on the 500 Billion dollar deficit we are sitting on. If the push is on to end Grandfathered revenue, it should be done over a period of years, to enable Business owners the time to make alternative arrangements that hopefully does not include retrenching staff."
Jeremy Wright 16:49 on 16 Aug 18
"The chief problem with most financial arrangements for retail clients is that there are many, many client who don't take ownership of their position beyond the initial engagement - we see this as a theme throughout all banking, superannuation and insurance products which is how many of the issues raised in the Royal Commission arise. Scrapping grandfathering isn't going to solve this problem. Getting people advice is. Perhaps a considered approach that retains some form of payment for advisors (grandfathered or not) would be better. Firstly, establish the value of advice/service being delivered by the advisors (perhaps through a formal study) - then implement a payment model that appropriately incentivises the advisors to actively engage clients on an ongoing basis. From my own book, where my model (since starting out a few years back) has been built on acquiring disengaged trail book clients and then engaging the clients as Fee for Service clients From my own analysis, I can see that overall the client book is far better off now than if I had not been getting paid trails whilst I engaged with the people who wanted to be engaged with. To me the question is not about whether there is value in the advisor relationships for grandfathered clients, it is about the price being paid, and how to make sure people actually get advice - which essentially means giving other people (ie advisors) incentives to engage with clients who won't act on things for themselves without prompting. The case study about the low return high fee cash option raised today at RC is the classic case in point. I have had many discussions with people in these options about why they need to act to get out of that - many don't want to act for whatever reason and then 3 years later they are still there worse off than ever. If it became an accepted part of the super system that you, saw a planner every 2-3 years (which was paid automatically by your fund regardless of where it was), perhaps people would be more trusting and be encouraged more to act in their own best interests. The extension of this is at what point the older funds paying the commissions needs to close down - because let's face it, whilst some of the funds are perfectly serviceable (if invested appropriately), unless insurance needs to be retained, on price grounds alone, there is pretty much never a reason for an advisor acting in a client's best interest to leave a client in an old retail fund that pays grandfathered comms (at least that I have come across). Perhaps it should be mandated that all super members (industry or not) must have access to a planner for a small fixed fee and that planners have mandated service obligations in order to get paid this from the advice pool. At the right price, at an industry level, in aggregate, super members and society would be much better off. "
not saying either 16:31 on 16 Aug 18
"I provide a service to assist my clients with their Cash and TD via ING direct and Macquarie . If grandfathered commissions were turned off in this case , I would have to reduce staff and turn clients away. Would be too difficult to charge an ASF. There are other investments that were made for clients with no upfronts and trails only. No one has the right to come along at any stage to take that income away from an advisor So Choice and all you other do gooders, I am here to find ways to reduce your salaries. "
Graeme 16:31 on 16 Aug 18
"Maurice - the insto's (BT etc) have indicated they're moving to stop all trailing comms eventually."
JB 16:31 on 16 Aug 18
"I provide a service to assist my clients with their Cash and TD via ING direct and Macquarie . If grandfathered commissions were turned off in this case , I would have to reduce staff and turn clients away. Would be too difficult to charge an ASF. There are other investments that were made for clients with no upfronts and trails only. No one has the right to come along at any stage to take that income away from an advisor So Choice and all you other do gooders, I am here to find ways to reduce your salaries. "
Graeme 16:29 on 16 Aug 18
"Along with other advisers I borrowed money to buy a book of clients on trail commissions on the basis that these clients are and will remain grandfathered. As clients become older they will progressively move out of these products. All the noise coming out of the Royal Commission from I can tell was about clients on service fees not receiving advice. Can someone explain to me why we're talking about clients on trail commissions instead? "
Maurice 16:24 on 16 Aug 18
"Cancelling grandfathering does not lower clients costs UNLESS the legislation insists that an equivalent reduction in client fees accompanies the turning off of legacy commission contracts. Without compensation, a High Court challenge is guaranteed. Furthermore, what about the clients forced to pay CGT for transfers and clients that lose grandfathered income test status for Pre 2015 Pensions. I suspect the government will ask industry for voluntary changes, and we'll see the trite responses like BT's and Macquarie's that disadvantage a handful of employed advisers for some cheap marketing. Client's can expect to be treated with continued disdain. "
Grant Simpson 16:17 on 16 Aug 18
"hit the advice person/firm in the guts.... the fees were set up as a part of the product... there was no obligation for service...although it was obvious a smart thing to do (at any time)…………. "
john 15:50 on 16 Aug 18
"What ever the consequences, this has to happen. It may initiate havoc in the industry short term, but the transparency it will provide for the public is paramount to restore trust. It's just not good enough to bury different fee disclorures on page 58 of a pds. I know advisers will hate to hear this but if the industry has to be brought to it's knees to clean it up and make it simple how payments are made - right across the board, then so be it."
not saying 15:47 on 16 Aug 18