What an ongoing fee is and isn’t

Addressing the AIOFP conference in Hobart on Wednesday, Philborne Financial Consultants director Phil Osborne said it was important for advisers to understand that not all flat-fee arrangements would qualify as ongoing fees under new royal commission legislation, which was set to come into force from 1 July.

“A lot of people I speak to assume ongoing fees mean whatever service you’ve got going around and are charging for, but that’s not the case – it’s actually defined in the Corporations Act, section 962A,” Mr Osborne said.

“It’s important to understand what is and isn’t an ongoing fee – if you have a fixed amount specified at the start of your arrangement, that is not necessarily an ongoing fee.”

Mr Osborne said the legislation specified that fixed fee arrangements were not classified as ongoing fees, as long as there was no amount that was contingent or variable on the amount of advice or assets under management.

“The fee charged can’t be related to the amount of investment advice you’re giving, so it’s not a case of saying ‘I’m investing a million dollars for you and my fee is 1 per cent of that which equals this dollar figure’ – you can’t actually say that’s how you do it,” Mr Osborne said.

Fees that were specifically related to products or insurance premiums also did not count as ongoing fees under the act, he said.

“We’re talking about how the Corporations Act defines it, so if you have clients paying you a set amount, a 12-month amount, and you re-do the contract in 12 months’ time, that’s not regarded by ASIC as an ongoing fee arrangement,” Mr Osborne said.

“Interestingly, if you’re doing this type of arrangement you also don’t have to provide a fee disclosure statement because you’re telling the clients what it is. It’s not a percentage base, which is the concern for the regulators because they can’t get through their heads that you can say it’s 1 per cent of assets under management, they don’t get that.

“That’s where they’re coming from in terms of ongoing fees, so please consider looking at your ongoing fee structure and working out whether you can go to what [the act] describes as an annual advice agreement, not an ongoing advice agreement.”