03 January 2019
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The Association of Financial Advisers has given further reasons on why it opposes the end of grandfathered commissions, outlining considerations the financial services Royal Commission did not address in public hearings.
While pressure from the broader community and the Hayne royal commission has pushed the big banks and AMP into ceding an end to grandfathered commissions, a high level of trail remuneration still in the advice ecosystem indicates reluctance in the wider advice community to follow suit.
AFA general manager of policy and professionalism Phil Anderson said the association's submission to the Royal Commission was more comprehensive than purely being an opponent to grandfathered commissions.
Anderson said the submission detailed the complexities and consequences of an immediate end to grandfathered commissions, which are arguably not in the best interests of advised clients. It also touched on how a gradual reduction of some commissions may work.
A Professional Planner online poll has revealed that 42% of advisers derive more than 15% of their revenue from grandfathered commissions, highlighting the dependence that the advice industry still has on legacy revenue.
He added no one has articulated the policy objective about removing grandfathered commissions. He questions whether it would be consumers or product providers that would benefit if the commissions were stopped suddenly.
"There are some products where you can turn it [commission] off and rebate it so it gets paid back to the client, such as in the form of an additional contribution," he said in an interview with Australian media outlet Financial Standard.
"That's not without complexity because there are tax issues as well. Clients might lose access to the advice but at least they would benefit from the trail commission being rebated."
However, there are also old legacy products where there's no mechanism to reimburse clients if trail commission is turned off. In the vast amount of cases where trail commission is turned off, the product provider is keeping the money, Anderson said.
The poll results provide a snapshot of how heavily reliant the financial advice community is on trailing commissions, which were banned as part of the Future of Financial Advice reforms in 2013 but allowed to continue due to a grandfathering arrangement.
While 58% of respondents said their practice received less than 15%of their revenue from grandfathered commissions, a combined 42% said they received either 15% to 25% (18.5%), 25 to 50% (11.5%) or over 50% (12%).
