The far-reaching effects of grandfathering

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Remuneration uncertainty for advisers will have a far-reaching effect.

Wealth Professional revealed last week that the grandfathering arrangements included in FoFA have placed restriction on movement within the industry. The regulations are also likely to impact on clients if they go ahead.

Hillary Ray, Consultant for Sparke Helmore Lawyers, says that it may be important to re-categorise remuneration in a different way altogether.

Going through the regulation, Ray says that she hasn’t felt “particularly enlightened”.

“The focus, from the ASIC perspective anyway, has been on putting in place regulations to produce good quality advice that genuinely looks at the clients best interests and that has been the focus.

“I guess nobody has looked at the other side of the transaction and the impact on the advisers.”

She recommends planners that have moved recently examine their remuneration arrangement very carefully and ensure there are no components that could be categorised as conflicted. They should also work out the structure of the remuneration, whether it comes from a product on a platform or not, and if any components might be caught.

However, Ray says that it is impractical not to use sales-based rewards in planning.

“Companies still have to reward their most productive sales people in some way, and a way that’s fair is to pay the sales people who sell the most, by giving them some sort of reward. That’s just sales.”

She says the most important thing is to make sure that the reward doesn’t influence the advice, and that one possible strategy could be to count the total number of products without looking at the particular kinds of products they sell.

"Personally I think companies should still be able to reward their most productive employees, otherwise what’s in it for the adviser or the planner?"

However, the grandfathering arrangements could also have an impact on clients if they go ahead.

AFA COO Phil Anderson says that if advisers do move, they may be forced to get all of the clients that are currently on trail commissions to change products, or arrangements.

“If you do need to get clients to move then there are issues such as CGT implications and potentially insurance impacts as well,” says Anderson. “So it would be highly disadvantageous for clients to be in a situation where their adviser needs to put them onto a new fee arrangement simply so their adviser can continue to be paid.

“It’s the individual that you’re most concerned about, because we’ve got advisers who are in the process of moving and they just have no knowledge of this so it’s a huge disturbance for them.”

Ray says that more guidance is needed from the regulator and that this is most likely needed in the form of additions to RG 246.

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  • Hillary Ray on 24/07/2013 10:07:12 AM

    Hi Matthew,

    That sounds like a commercial, forward-thinking and compliant approach to me, thank you for posting.

  • GB on 22/07/2013 9:51:15 PM

    There are still some planning/risk businesses operating in the market place that rely upon upfront revenue (risk commission) to remain viable. Some of these businesses even try to compete for clients that the major institutions resolve to service via lower cost methods such as phone based advise. These product focused businesses will likely disappear for two reasons: 1) they may not be able to offer adviser remuneration which is less conflicted, and 2) the advisers may find it extremely difficult to dispense their "client best interest" duty. Fewer product advisers and increased competition from accountant will lead to a smaller but more professional advisory profession.

  • Matthew Lock on 22/07/2013 11:01:02 AM

    “Companies still have to reward their most productive sales people in some way, and a way that’s fair is to pay the sales people who sell the most, by giving them some sort of reward. That’s just sales.”
    Hi Hillary…I believe you can provide an incentive to sales people provided the focus of the business is aligned correctly. Some years ago I worked in a planning business that had a very strong focus on building a solid EBIT through the delivery of ongoing services to fee paying clients on a retainer contract. To help the front-end advisers to start focussing on retainer clients, we changed their remuneration structure so that they were rewarded for both signing up new retainer clients AND for maintain retaining client within the service.
    The effects of this change were twofold. Firstly the upfront client value proposition shifted away from a product focus toward an ongoing service almost overnight. Secondly the way in which the front end adviser dealt with the client…the client service delivery model and client experience changed dramatically…if you are selling ongoing retainer relationships you have to focus on what the business can realistically deliver to them...not some short term investment guru with a crystal ball promising them fantastic product returns from a market that they have little or no control over.

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