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Views Split on Call to End Grandfathered Commissions

The AFA and FPA have fallen on opposite sides of the fence in their support for the suggestion that grandfathered payments and commissions come to an end, five years after the Future of Financial Advice (FoFA) reforms allowed them to continue.

The two groups put forward their stance on the matter in submissions to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which allowed parties that appeared at recent hearings into financial advice to comment on the question of whether grandfathered commissions should cease.

The FPA, in its submission, stated commissions are built in to the fee structure of many older products and for their removal to have any effect would also require a change in the way these products were treated by product manufacturers.

The submission added that grandfathered commissions had led to situations where consumers were paying fees without receiving services and moving all ongoing fee arrangements to an opt-in basis would cause all grandfathered fee arrangements to rapidly end.

“…it is time to review the appropriateness of grandfathered commissions…”

“With FoFA having commenced five years ago it is therefore time to review the appropriateness of grandfathered commissions and identify an appropriate means of transitioning these payments either to an alternative remuneration model or out of existence,” the FPA submission noted, adding that all such arrangement on superannuation and investment advice should be phased out over a three-year transition period.

This position was supported by ASIC which stated, in its submission, that the inclusion of grandfathered commission under the FoFA reforms was not meant to continue in perpuity and that it should not extend to new clients or new situations, as it does under the current arrangements.

“ASIC is concerned that almost five years after the implementation of the FoFA reforms, grandfathered commissions continue to form a significant proportion of licensee/adviser remuneration and grandfathered commissions operate to incentivise advisers to keep clients in legacy products with a continuing commission structure, even where there may be better products available to meet the client’s needs,” the submission stated.

The AFA, however, claimed there were no grounds to cease grandfathered commissions and doing so was unlikely to directly benefit consumers in any way.

The Association’s submission pointed out that grandfathered trail commissions were not paid by a consumer but by the product provider to a licensee or adviser and consumers did not receive a rebate or reduced product fee when grandfathered commissions were turned off.

“…almost five years after the implementation of the FoFA reforms, grandfathered commissions continue to form a significant proportion of licensee/adviser remuneration…”

“This would mean that the client gets no benefit through a product fee reduction and would also lose access to the financial adviser unless they agreed to establishing an ongoing fee arrangement, that would involve a material additional cost,” the AFA submission stated.

The AFA also pointed to the fact the older products may have exit fees, buy/sell margins, capital gains tax triggers and lose of insurance cover which may be keeping consumers, and advisers, from moving away from products with grandfathered commissions.

The difference of views also extended to AMP, ANZ, NAB and Westpac which also addressed the issues of grandfathered commission in their submissions to the Royal Commission.

AMP referenced the existing contractual obligations for product providers as well as the gradual transition away from grandfathered arrangements as sufficient reason to leave the current system in place, while ANZ stated there was insufficient evidence before the Royal Commission to establish if grandfathered commissions led to inappropriate advice and more evidence was required before considering any changes.

Both NAB and Westpac, however, were in favour of changes taking place during a reasonable transition period that took into consideration the impact on the cost of advice to consumers and the potential damage to financial advisers who may be reliant on grandfathered commissions as part of their revenue stream.

  • GregF

    What many people seem to overlook, whether those on the moral high ground like it or not, is that trail commission paid on older products was not specifically paid to cover the cost of providing advice. It was a share of the product revenue for firstly placing it with a particular company and then to provide ongoing ‘service’ in relation to that client. Services could include things specific to the actual product or it may include broader financial advice. It is an ongoing share in the profit of the product. Why should the person who placed this business in the first place be the only one to lose out if trails are removed? Does the institution also reduce it’s share of the charge? No mention of that anywhere; rather just another destructive blow to a hard earned business. My business has taken me 30 plus years to build up and as I approach the time where I look to sell it and provide for my retirement I am faced with yet another massive devaluation due to pressure from ill-informed bureaucrats, egged on by the like of the ISA and some of the institutions (surprise surprise), to dictate how and why I should receive income. I am contractually entitled to receive these commissions, trails, brokerage or whatever you want to call them. And on top of that, it was legislated only a few years ago that they will remain and be grandfathered. I have already lost a very large segment of my renewal income due to MySuper, which had an immediate devaluation effect on the value of my business. Now I am faced with as much as 50% of my business value being destroyed. I will be demanding compensation if this is to occur. No other industry would have to put up with this sort of treatment! But the FPA supports it. Typical of how out of touch they are with the genuine sole practitioners.

    • Robert Delmenico

      Spot on.

    • Jimmy

      If you were a taxi plate owner the government will be putting a charge on all taxi & uber users to compensate you for your ‘loss’, doubt any such scheme will be put in place for us.

    • David

      Spot on GregF. Gradfathered commissions are already running off at a rapid rate and should be left alone as our industry which is already weighed down with tons of excessive red tape and demands from anoyone & everyone who wants to poke & prod us tries to swallow the watermelon of crap thrown at it over the last 5-7 years and no doubt will see more well intentioned but pathetic red tape lumped on it following the RC that will only make it more impossible to actually help clients and run a business!

      • BKY

        If the people running the RC had a clue, they would realise that Grandfathered commissions are like the Dinosaurs…a thing of the past anyway. If they actually understood the compliance regime that’s now in place in regards mainly to BID, then they would realise that to act in a client’s best interest means that you have to research like-for-like products and platforms and without knowing everything, I would hazard a guess that most (if not all) the newer platforms have ridiculously cheaper fees while offering the same if not better benefits and services, than the old style products and platforms. So basically you will be forced to switch them and from my understanding (unless I’m wrong) this will result of the client exiting the “Grandfathered” landscape anyway. I’m of course referring to Investment and NOT insurance. My understanding is that Insurance commissions were not “Grandfathered” per-say, they were carved out of FOFA.

    • Ken

      You me and many others are the real losers in this if it is passed
      I as you have worked 40 years building a business that can maintain us in retirement or be sold to an up and coming adviser who understands clients needs I truely would be assessing who takes over from me ! Someone who cares
      Now it’s on the cards to remove these rewards as you have stated
      Would the insurance companies be prepared to buy them out st 3 times the value if it proceeds ? I doubt it
      Class action here we come !

    • BKY

      I feel a civil action from the Adviser community coming on against someone…AFA, FPA, FSC, Federal Government…someone will have to pay for the loss of hard earned equity.

  • Frustrated!

    When an adviser acts in the best interests of the client and recommends a move from an older legacy product to a better quality product, we are at risk of being accused of churning. Then ASIC come out and state – “grandfathered commissions operate to incentivise advisers to keep clients in legacy products with a continuing commission structure, even where there may be better products available to meet the client’s needs”. They are now encouraging us to do the right thing by our clients, but will they still accuse us of churning?
    Furthermore, many clients who have their insurance in legacy products have experienced changes to their health, especially if they have had cover for a number of years and are “getting on in life”. To recommend a move to a better quality product may result in loadings and/or exclusions which they may not currently have. in that case, it is better to leave them where they are. Yet ASIC’s comments re grandfathering fail to take this into account!

  • Jeremy Wright

    Here we go again. A plethora of recommendations.

    Two simple strategies to live by;

    1) Be careful of what you wish for.
    2) What is the end result going to look like.

    All the hand wringing around Grandfathered commissions should also include what will be the end result of banning them.

    Those commissions are, for most clients, their opportunity to access advice and have
    someone to talk to when they need help.

    It seems to be swept under the carpet that there are costs to run a Business and employ people.

    Those grandfathered commissions, pay some of the running costs.

    By banning them, will cause a ripple effect, which is always, “for every action, there is a reaction.”

    The banning Grandfathered commissions “ACTION,” will produce a “REACTION” of
    Businesses laying off staff and downsizing their service offerings to only the top 20% of income earners who can afford to pay and are more educated to attaining advice.

    The end result will be a dilution and eventual cessation of providing advice to the 80%
    of Australians, who did have an opportunity to improve their lives by the annual offer of a review, though now in the brave new world, will no longer be clients and therefore will receive no advice.

    ASIC and a plethora of entitles seem not to be able to recognise that and seem to think
    that Grandfathered commissions is a golden egg for nil outlay.

    Only public servants live in that world. The rest of us who run our Businesses and
    employ people know that unless expenses can be met, there is no Business.

    The question must be asked, does ASIC and the Government want Australians the opportunity to be able to attain advice or not.

    If yes, then they need to stop being so small minded and simplistic with their viewpoints.

    I am constantly amazed how the Financial Planning Industry dances around the main
    issues and ignores what is blatantly obvious, so they do not appear to be offending anyone.

    The unions, ASIC, Choice etc. have their own agenda’s.

    It is about time our Industry confronted them all and demand answers to their simplistic attacks.

    • BKY

      never going to happen…there’s too much money in the education standards for the AFA and I dare say the FPA…there was (as I remember) the carrot of legislating that advisers must be members…not sure about this but I seem to remember something about advisers being required to be a member…again I could be wrong as there has been so much to try and absorb over the past several years…good luck fellow advisers

  • Unfair

    Seriously. For the moment can I ask that people focus on business owners recently purchased existing grandfathered arrangements under the legislation which approves of grandfathered commissions. Imagine a business owner with 600k trail that purchased at 3 times. A potential liability of $1.8 Million. Logically given a P&I loan structure of 10 -15 years to repay only now to be told that this may income may now discontinue. Lets work through a little more. The business now has no income due to this potential legislative change. The loan covenants automatically are breached and the business owner is immediately insolvent i.e. Assets < Liabilities. The director is to appoint a liquidator within 30 days or may face prosecution from ASIC. The director guarantee with the bank potentially means now the owner is a discharged bankrupt and this is the final nail in the coffin. The owner can never be an authorised representative, director or even potentially manage another institution depending on how many businesses owned fail. The legislation has a much broader implication then just turning off grandfathered commissions. I wonder if Peter Costello before suggesting their should be a blanket ban has thought about the flow through consequences of such a move.

  • Michael Holmes CFP

    simply answer if ongoing grandfathered commissions are removed, let the clients call the product providers directly and cease our personalised service and cut the workforce by 50% so 8 to 4 as these ongoing cashflows assist us in providing this service to our clients. I’m sure the clients will be upset if they walk into our office and we say here is TAL’s or ONEPATHS direct line etc.