Complaint on the cards over 'insidious' exit fees

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Australia’s largest independently owned financial advice group is considering lodging a formal complaint about licensees charging exit fees.

Synchron director Don Trapnell told Wealth Professional he knows of two firms – in Western Australia and Queensland – who charge a “substantial amount of money” to dealers who attempt to move licensees.

If they are being charged a seperate, specific run off cover, then they should have the right to recover it, but they don't, said Trapnell.

“It’s particularly insidious because it’s using the guise of professional indemnity insurance for run off cover instead of calling it what it is, an exit fee."

The practice is “totally inappropriate” as advisers can best serve clients if they can move to licensees which better suit their business model, he said.

FoFA changes have meant advisers who move from one licensee to another after 1 July lose their grandfather commission on investment products, which is legislative restraint of trade, said Trapnell.

“That, I believe, is going to be rectified by the new minister, but advisers should not be subjected to the same restraint of trade restriction by their licensee as well.

“There’s an expression I often use called the Hotel California. You can check out any time you like, but you can never leave.” 

There are two ways licensees are using ‘Hotel California’ provisions to trap advisers, said Trapnell.

One is by charging exit fees, and the other is having a compulsory review of investments of all clients built into their dealer transfer agreement.

Most licensees enter dealer-to-dealer agreements in order to have a smooth transition of clients without the adviser having to get individual clients to sign letters. But Trapnell knows of two Queensland licensees that have a clause saying the new licensee will do a full review of the investments of transferring clients within six months of transfer.

“So this clause is attempting to bind a third party – the client – who is not part of the agreement to the agreement. So what if the client says ‘no, I do not want to be reviewed’? Is there any legal obligation on this client to be reviewed? Clearly not. So what then becomes the problem?” asked Trapnell.

He answered himself: if something goes wrong with the portfolio and the client lodges a complaint, the new licensee is not protected with professional indemnity insurance because of that clause in the dealer-to-dealer agreement.

“This review of investments clause effectively requires a new licensee to breach their licence conditions.”

These two devices are ring-fencing advisers in so they cannot leave and that affects the whole industry, said Trapnell. His firm is considering laying a complaint with the Australian Competition and Consumer Commission (ACCC).

“If we make it easy for the adviser to leave, they might come back to us once they find the grass isn’t greener… If you love them you’ll set them free, if they love you they’ll stay.”

When Wealth Professional asked regulatory bodies for comment on the issue, ACCC said ASIC would be better answering questions as the financial product regulator.

But ASIC could not provide much advice either.

“Currently, as our regulatory document states, run-off cover is not required as a policy feature. We will continue to monitor the availability of automatic run-off cover and may reassess our position,” a spokesman said.