ASIC report raises concerns

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The amount of licensees owned by product providers is causing concern in the industry.

ASIC has completed a review of the 21-50 largest AFSLs that provide financial advice. The review, Report 362, follows on from Report 251, which reviewed the 20 largest AFSLs.

One of the key findings and concerns of the report, according to Bluepoint Consulting director Tony Bates, is that too many advisers are still being paid by product issuers. ASIC said that this would give rise to potential and actual conflicts of interest, and while FoFA reforms will remove many of the conflicts, it will not remove them all.

FOFA’s two main targets are conflicted remuneration (e.g. volume bonuses, soft dollars and geared asset based fees) and ‘C Class’ client trailers (e.g. ongoing payments to advisers where there is no ongoing service), says Bates.

“It’s about time these payments were stopped.”

ASIC’s review found that the majority of advisers were remunerated by product providers based on volumes, receiving upfront and trailing commissions. Forty-three percent of remuneration was on-going/trail commissions paid by product providers, 16% was upfront/initial commissions from product providers and 5% was volume payments/bonuses/fee rebates.

Twenty-one percent of fees were paid directly by clients according to assets under service, and 11% by a set rate.

“I’m concerned that a customer walking into an advice practice is more often than not, despite what the SoA says, blissfully unaware that the ultimate owner of the advice practice is a product issuer, and that the adviser is earning more than half of its remuneration from those products,” says Bates.

He says that it’s not surprising that advisers are feeling bogged down with FoFA, as yesterday was the last day to send out Fee Disclosure Statements for many advisers. Bates is interested to hear how clients are receiving them and how well the fees will be captured.

ASIC also expressed concern over product concentration.

“Any product failure will have a much greater impact on licensees whose product recommendations are concentrated into a small number of products, not only in relation to client losses but also in relation to the licensees’ income if a large proportion of their income is from commissions,” said the report.

However, underlying one equity fund there is potentially 80-200 stocks, says Bates, who is less concerned about this risk.