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Royal Commission 2: Goodbye grandfathering, hello fee-for-service

“My personal opinion is I can’t wait for the day we are fully fee-for-service for insurance and super.”   Michael Wright, Westpac Head of Advice, to Royal Commission, 20 April 2018

“My preference would be for fee arrangements but the arrangements that exist between the clients and their advisers are the arrangements that exist between the clients and the advisers.” Anthony ‘Jack’ Regan, AMP Group Executive, Advice, to Royal Commission, 17 April 2018

These preferences expressed by two heads of advice at leading financial institutions seem to indicate an industry that wishes to move away from commissions to a fee-for-service model.

Don’t believe it will happen voluntarily. All the majors lobbied hard for grandfathering of commissions, and it remains a major source of revenue to this day, including 70% of advice revenue at AMP.

Grandfathering is receiving a lot of attention at the Royal Commission, and was a highly debated subject in the Future of Financial Advice (FOFA) regulations that came into effect on 1 July 2013. It received heavy scrutiny when Jack Regan of AMP was in the witness box, and this article examines his evidence in detail to explain the issue.

What is grandfathering under FOFA?

Prior to FOFA, a primary source of ‘conflicted advice’ was the payment by product providers of commissions to financial advisers, giving an incentive to recommend particular products to clients. The conflict is obvious. If a platform provider or fund manager pays an adviser a commission, the adviser may be influenced not to recommend the product best suited for a client, and therefore not act in the client's best interests.

The grandfathering provisions in FOFA are complex, but generally, they preserved existing contractual rights to receive product commissions after 1 July 2013. The rate of commission could not be increased as that represented a new arrangement and would become ‘conflicted remuneration’. Commissions on financial products acquired by clients after 1 July 2013 were banned. The major banks and AMP fought for grandfathering as they all owned financial advice businesses that relied on receiving commissions from product providers. Although five years have elapsed since the date of the ban, significant chunks of advice business still receive commissions, and their retention is vital to the economics of many advice businesses, including the value of an advice book if it is transferred to another adviser.

FOFA also required financial advisers to ask customers to ‘opt-in' every two years if they wished to receive ongoing advice, and this was also strongly resisted by the industry. Commission arrangements that are grandfathered are exempt from this requirement, and the commission does not need to be revealed to the client. These are additional benefits of hanging onto an old book of business.

If commissions were bad for conflicted advice, why did the legislation grandfather them? If advisers are acting in the best interest of clients, why do they retain commissions to this day? Will the Commission recommend removing grandfathering? What impact will this have on viability of financial advice groups?

What did the Commission learn about grandfathering?

Michael Hodge (MH), Counsel Assisting the Commission, interrogated Jack Regan (JR) on the first and second day of the Round 2 interviews. The following transcript also gives an insight into how the Commission extracts embarrassing admissions from executives, with as much revealed by the non-answers as the answers.

 MH: I want to understand AMP's attitude to grandfathering commissions. It is possible, isn’t it, for an AMP authorised representative or financial planner to rebate to the client the entire amount of a commission received?

 JR: Yes, they can.

 MH: And one possible arrangement that some financial planners would or have entered into with clients is that they rebate the entire amount of the commission, and then charge a separate ongoing advice fee for whatever the ongoing advice is that they’re providing?

JR: Yes.

MH: You’re familiar with that type of arrangement?

JR: Yes, I’ve read of it, yes, yes.

MH: Is that not an arrangement that’s encouraged within AMP?

JR: I couldn’t comment, to be honest, Mr Hodge.

MH: Well, you are the group executive for the advice business?

JR: Mmm.

MH: You are ultimately responsible, I assume, for the 2800 planners that sit within the AMP network of planners?

JR: Mmm.

MH: Is it really your position that you cannot comment on AMP's attitude as to the idea of dialling down commissions?

JR: So all I was getting at was that you – I’m not sure of what direction has been given to our advisers. I’m simply not close enough to the detail in that regard.

MH: If we continue through with the nature of this arrangement that I’m talking about, if you dial down the entire commission, or possibly by changing it with the product issuer or alternatively by rebating the entire commission to the client, and then you charge the client an ongoing service fee, that means that all of the legislative arrangements under FOFA apply to that ongoing service fee. You agree?

JR: Yes.

MH: If the only fee that a planner is charging to a client is an ongoing fee, then they need to provide a fee disclosure statement to the client?

JR: That’s correct.

MH: For the entire amount they are charging to the client?

JR: That’s correct.

MH: Similarly they need to provide opt-in notices to the client?

JR: That’s correct.

MH: And the client needs to opt in?

JR: That’s correct.

MH: Does AMP, in respect of its advice business of which you are the head, have an attitude as to whether it will be appropriate for financial planners to not charge or take commissions and to, instead, only charge fees for advice, service fees for advice?

JR: So we leave that at the contract level of the negotiated level with the client and the adviser, is my understanding of it.

MH: So AMP has no view as to whether its planners should or should not cease retaining commissions and only charge for services provided?

JR: I haven’t seen any specific communications in that regard.  If you’re - - -

MH: No, no, Mr Regan, you’re the group executive in charge of advice?

JR: Mmm.

MH: Ultimately, the decision must be yours made in consultation with the GLT, I assume. You’re responsible for it. You might discuss it with the GLT. Do you agree? [GLT is Group Leadership Team].

JR: I haven’t had discussions in that regard with the GLT.

MH: Have you turned your mind at all to the question of whether it is appropriate for planners to continue to take commissions in respect of their clients?

JR: My preference would be for fee arrangements but the arrangements that exist between the clients and their advisers are the arrangements that exist between the clients and the advisers.

MH: Is there anything that would stop AMP from adopting that as a position, an official position that its planners should not be taking commissions from products and should only be receiving fees for service?

JR: So it’s able to be done, if that’s the question?

MH: Yes?

JR: Yes, we could adopt that position, yes.

MH: And why don’t you?

JR: I will be honest and say, Mr Hodge, I haven’t turned my mind to it. The arrangements that we have in place are to allow the planners to negotiate their own arrangements with their clients, and we’re working through the overall grandfathering period as things currently stand.

MH: I’m sorry, when you say “working through the overall grandfathering period” what does that mean?

JR: So progressively the commission is dropping away and the fees are taking over. So as clients, for example, negotiated into new arrangements, the commissions fall away, as we’ve noted, or alternatively, customers complete their arrangements, new customers come on, but as you could tell from that table, the proportion of fees as a function of the – the total, if you accept the percentage I gave you before, if you go back to the – to the start of the period, you know, it’s gone from something like 10%, being fees to something like 40% being fees.

MH: I think you said 30% yesterday?

JR: Yes, 30 or 40%, yes. I’m approximating for the sake of the discussion but the point I’m making is that the commissions are phasing out over time which, as I understand it, was the approach that was a function of FOFA.

MH: And that’s over a period of, what, almost five years?

JR: Yes.

MH: Does AMP have any estimate as to how long it will take for commissions to phase out entirely?

JR: I don’t have that estimate, Mr Hodge.

MH: Do you, as the head of advice – I’m sorry, as the group executive in charge of advice, have a view about whether the taking or continued taking of commissions is compatible with the purported professionalisation of financial planners?

JR: Well, as I said before, my preference would be for fee arrangements expressly.

MH: And is that because you don’t think that it is compatible with the idea of financial planners being a profession, that they continue to receive commissions?

JR: I think fees are much more consistent with a professional environment, yes.

What will the Commission conclude from such exchanges?

Commissioner Kenneth Hayne is grappling with the conflict between commissions and best interest duty, and between providing products and advice under the same corporate structure. AMP would prefer to move to a fee-for-service model, but cannot let go of commissions because they make too much money from them. AMP does not know how long the commissions will last, although they could remove them immediately. The Commission's decision will have a profound impact.


Graham Hand is Managing Editor of Cuffelinks.

April 29, 2018

Many wrap platforms have caps on total Admin fees already. Generally around the $3500 mark. We are a 16 yo planning practice at a client with a million will pay approx 0.7% for advice platform fee and manager fee with our model portfolio, less than many industry funds AND with advice built in. We run on asset based advice fee and it has worked fine. Every part of the advice chain is reducing costs except for the fund manager. At one thousand or one million fund managers charge the same ICR. It’s about time that they share the load.

April 30, 2018

"We run on (sic) asset based advice fee and it has worked fine." Worked fine for whom - you (your income) or the client (their cost)? I am not sure that someone with say $500k should pay twice as much for advice than someone with $250k - in fact sometimes the lower balance person needs more attention because of more immediate Centrelink and other implications. The fact is that you don't know how long you will spend on advising someone until you know all their circumstances, and account balance is only one aspect of their total financial situation. This is why fee-for-service in respect of advice makes sense - imagine if your doctor charged you twice as much than your neighbour because you were taller or heavier!

What puzzles me (and I think the Royal Commission as well) is how an organisation also justifies charging an administration fee that is asset based - why should someone who has $500k in their account pay twice as much for administration as someone who has $250k? I acknowledge that processing of transactions incurs costs (so in theory we should instead see more transaction fees), but if I have twice as much money as someone else just sitting there, with no further transactions, why should I pay an admin fee that is twice as much?

April 29, 2018

Businesses were built on the rules of the day, now we are proposing to go back and change those rules? How is that possible. Imagine if we said neg gearing was unfair to the tax payer and we will unwind everybody's deduction back since it started. The FOFA rules have changed this completely, any planner who has taken on a client since 1st July 2013 cannot get commission on any investment product/s, it has already been fixed!!

April 29, 2018

Gee Graeme, only a licence fee! I thought they had to do a 2 day weekend course to enable them to give "professional" (one was hoping ethical and moral as well) financial advice, which influenced people for the rest of their lives!

April 28, 2018

Jimmy was correct when he stated it is not as simple as it seems. The regulation and correspondingly the fees have increased post FOFA. If I have to negotiate fees and implement opt in with clients pre FOFA then the fees will go up substantially for a lot of these clients. Many will not be able to afford it. Most advisers provide advice to these older clients out of loyalty to them. Advice is provided as and when needed as opposed to structured annual reviews and opt in. These comments do not apply to all pre FOFA as clearly some higher net worth clients can afford the fees.

Also opt in only applies to new clients post July 1 2013. A slight simplification but opt in does not relate to all fee paying clients.

We need to be careful that any new arrangements do not exclude a substantial number of clients from receiving advice.

April 26, 2018

Ah, memories. Back in the early 80s I remember a common up-front fee for a managed trust was 5%. 1% went to the fund manager and the other 4% was for the investment adviser. The term financial planner was rarely used back then. Not surprisingly, funds that charged a lower up-front fee were rarely recommended.

Not entirely sure of this, but I seem to recall that the sole requirement to be an adviser in those days was to pay the licence fee. The more cynical used to say that the licence came in a Corn Flakes packet in lieu of a plastic toy. There was a rotation between selling houses and investment products, depending on what was booming at the time. Neither profession had a high reputation.

If, like me, you didn’t need an adviser, the fund manager kept the whole 5%. No way would they rebate it to me, because it put the advisers off side. I, and I assume others, fortunately found a tame adviser who would happily rebate his (not many 'hers' back then) ‘commission’ for a small fee. Out of this evolved the ‘no advice’ advisers who would rebate up to 3/4 of the commission. End result to the investor was a 2% fee, rather than 5%.

At the time some of the more respected advisers, who probably not co-incidentally were the most qualified, were recommending and charging a fee for service. Most of the financial press were saying that this was the way to go. Little did they know that 35 years later it is still being discussed.

Philip Carman
April 30, 2018

Graeme, we actually had a licencing system (about 30 years ago) which was divided into Advisers (who could NOT take commissions and charged fee for service) and Dealers (who could, so took commission on sales of product) - so that consumers might be able to distinguish between those selling and those advising ... but (I'm pretty sure) under Howard that was dropped in favour of the AFSL which does not draw that distinction. That was a massive retrograde step, but one which the Life Offices and Banks wanted so that they could build vertically integrated businesses. From memory it was the head of NML (Gilbert??) who was very close to Howard and who was instrumental in lobbying for that. Let's make no mistake - the faults of our system and the reason why ASIC is hamstrung with too little resources and too wide a remit to be able to cover all crimes until well after the fact is a deliberate act of negligence and under resourcing of what is regarded as "red tape" and a hindrance to business. I actually believe that red tape is society's investment and that it's vandalism of the highest order to destroy the regulations we've often taken decades to put in place - but I'd be lonely out there in the business community, wouldn't I?

April 26, 2018

I dont believe the process of rebating commissions is as easy as Mr Hodge has made it out to be. Many of these products dont allow for the commission to be dialled down to zero, so it is still paid to the adviser. Rebating would require all these payments to be identified & then paid to the client. So I give the client a cheque for $X and then have them give me a cheque for $Y, is that how it will work? Will that be monthly? Or would annually suffice? What about commissions on superannuation accounts? Does that go to the member? Or is that then considered an early withdrawal? Should it be paid into their super accounts? But how is that treated as a contribution? Concessional? Non-concessional? Will the Govt set up a new contribution class called "Rebated Super Comms"?

In most cases the commission paid to the adviser is an in-built part of the MER/ICR cost, and in days gone by, if the adviser was removed from the policy the commission component of the MER would still be charged and simply retained by the fund manager, boosting their profits.

Or alternatively, there was/is a very strong incentive to make it difficult for advisers to leave an AFSL and move to another. Which is why AMP adviser agreements state that AMP owns the clients & not the individual practices. It's also why groups like COUNT Wealth Advisers would make any accountant/planner that wanted to leave COUNT write and receive approval from every single client to confirm they wanted to continue their relationship with the adviser. Any clients that failed to return the forms were retained by COUNT.

Gen Y
April 27, 2018

It would be pretty easy if the products were mandated to turn off commissions and reduce their fee by the commission amount!


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