In a submission to Treasury, AFA chief executive Philip Kewin noted the many advisers who have recently acquired books of grandfathered commission clients as part of an initiative to build their business.
He said this had become a common strategy for younger advisers and often encouraged by their licensee or a related party.
“For these younger advisers, it was an opportunity to acquire a book of clients that they could then work with and, over time, transition to a fee-for-service arrangement,” Mr Kewin said.
“Quite often these younger advisers borrowed money in order to acquire these businesses and have large business debts that they need to service.”
Mr Kewin also pointed out that advisers often use a combination of business assets and personal assets, such as family homes, as security for business loans, and that loans are typically arranged on a maximum loan to value ratio, with grandfathered commissions attracting a multiplier of between 2.5 and 3.5 times recurring income.
That considered, Mr Kewin said the removal of any value attributed to these grandfathered commission clients will place these businesses at risk of exceeding the maximum permissible loan to value ratio and there being non-compliant with their loan agreement.
“The impact of this is very real and unless the banks are prepared to show some discretion, it is very likely that we will see a sizeable number of businesses both in distress and failing,” he said.
“With the declining value of financial adviser businesses this will also put the homes of a number of advisers at risk.”
Should the government proceed with banning grandfathered commissions, Mr Kewin recommended that it be done by settlement between product providers and licensees.
He said any legislation should be based upon a three-year transition period from the date that the legislation is passed.
Further, Mr Kewin said consideration should also be given to exempting some legacy products, such as lifetime annuities, endowment policies and whole-of-life policies where there is no practical solution for rebating the banned grandfathered commissions.
In addition, he called on the government to provide Capital Gains Tax roll-over relief and Centrelink roll-over relief to enable impacted clients to move from legacy uncompetitive products to competitive products.
Lastly, Mr Kewin said exemption should also be made available to clients who would be disadvantaged by being moved to another product, and who can elect to continue to be in grandfathered commission products and for their advisers to continue to be remunerated.
“This might be on the basis of a facility to allow the clients to direct the payment of the rebate to their adviser,” he said.
How can people complain about grand-fathered commission ending? Rob Coyte your comment regarding property rights is preposterous. What about the property rights of the individual who was sold into the product and has coughed up dearly over the years as a result? What entitles you to their property? If people have been silly enough to buy a business based on revenue you should not be entitled to, that is poor business, do not blame it on the Government.
For the record, I have no problems with insurance commissions, because you actually have to do some work to earn them. Before anyone suggests that it is the same with grand-fathered commissions, don’t give me that crap. I have seen first hand, practices love them because there is no ongoing fee disclosure and no service obligations…they are getting paid without do anything for it….property rights you say….
I am so sorry folks. We have missed the boat on this opportunity. The moment that they created difference through updated non-commission based products that immediately created the opportunity at some time in the future to pull the conflict of interest card and in reality they are right unfortunately. We should have had this fight years ago before carving out commissions which is what the mortgage brokers are so valiantly trying to intercept. Our main error is we placed our faith in the hands of peak bodies who were being supportive of higher sponsoring banks and product providers who were effectively trying to diminish our market power. Its economics 101 and then we fell for it and the government fell for it and now we are here. Welcome to the world of General advice and robo unfortunately for surely the contestable market for the 20000 financial advisers has got a whole lot smaller.
So the government is in the business of taking away property rights and over throwing contracts that were entered in good faith and legal at the time……path to no where good.
“BUT why should we do a useless degree if risk commissions are under threat and many of us would be put out of business anyway?”
Why, you ask? Doing that useless degree might keep you in a job if intending to stay in finance. You will be competing for a job with degree qualified candidates with experience in finance. I would get cracking on it…
Glad I did my degree and masters now. Busted my butt for years and all I hear is whinging from advisers. I feel for the ones who do have degrees in finance and now have to do bridging courses…but for those that didn’t study…tough titties.
We are really going to suffer as a result. With the changes to Corporate Super a few years back and now the forthcoming changes, we are going to have more debt than equity (based on current valuation terms).
I have already laid off 8 staff, all good people with families to support, and closed an office in anticipation of the changes, but that still will not go close to closing the gap in revenue that will occur.
I’m just watching the clock tick by until I will have to consider bankruptcy.
It is a very sad state of affairs.
It is true that we do not see each and every trail commission paying client each year. But we do contact them at least. Whenever they have an enquiry, need assistance with competing paperwork, death benefit nominations, additional pension payments, death, or other insurance, claims – we are always there for them. These are the people who need the assistance and are going to suffer the most as a result of the legislation. Product providers will not be able to look after them the way we do.
if all commissions are going then the product will need to come down in price, we all know this is not going to happen, but product providers need to wake up to the fact that in the new world if your only means of distribution is via a channel that the consumer is paying to use then your premiums will need to be compelling, other wise there is absolutely no reason or value in paying for the service and we will see a surge in people taking up poor quality on line general products. Why is it that advisers seem to be wearing all of the costs, the loss and the change on their shoulders.
There is a precedent…..look at the taxi industry in Vic. The government doesn’t give a stuff nor does ASIC or any of the other regulators. I’m afraid your young advisers will just need to go broke whilst the individuals, corporations and regulators carry on with their comfortable existence. See you at the next Royal Commission in about 5 years.
It’s not just young advisers being hit hard. Its not even just advisers with grandfathered commissions. What about advisers with risk books. Right now we have a choice. Do a useless degree or be out of the industry in 5 years. BUT why should we do a useless degree if risk commissions are under threat and many of us would be put out of business anyway? Right now we are expected to just wait until 2021 to know the answer BUT we are expected to make a decision NOW on whether to spend $1000’s and countless hours on this useless degree. It is a complete joke!!
I believe if the commissions are banned then the government needs to pay advisers for their losses. I also believe that if they are devaluing businesses through legislation they need to pay up here also. This is very unfair to not just young advisers but any who have bought in and paid what was a fair price for their businesses and then have that eroded away by people who sit on their high horses saying what a good thing they are doing for society all because it doesn’t effect them personally. Then lets just also make the advisers do exams and Uni degrees – another cost and yes it doesn’t matter if you have a business to run, years of industry experience and children to look after etc or even if you are 50 years old – no get out there and study cause we believe you will have more ethics when you have a Uni degree!!! If you don’t pass the exam by 1/1/2021 – you will have no business – no one to mentor you as you are a sole trader – oh well just close the business down as you can no longer advise your clients if you don’t pass. What a pathetic joke – I am guessing the government just wants less advisers and more people in industry funds. Anything can be justified if you try hard enough eh
Why is this difficult? Get the product provider to pay the adviser three times revenue and move on!