Provide Appropriate Advice and Services Diploma of Financial Planning

1. Provide Appropriate Advice and ServicesDiploma of Financial Planning

3. The debate between whether it is more appropriate to charge a client a fee or a commission, is almost as old as the profession of financial planning itself Fees and Commissions • This presentation looks at how most planner charge for their services and how this debate has evolved over time • Important regulatory changes are also introduced and analysed

4. Kevin Rudd’s first prime ministerial ship proposed a host of legislative changes Fees and Commissions • Among these was FOFA – the Future of Financial Advise • Many financial planning practices have grappled with how best to implement these significant change, into their businesses

5. FOFA – July 2013 The Regulatory Environment A prospective ban on conflicted remuneration structures including commissions The introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients Increasing transparency and flexibility of payments for financial advice by introducing a two-yearly opt-in arrangement Expanding the availability of low-cost 'simple advice' to improve access to and affordability of financial advice.

6. The Regulatory Environment FOFA (continued) Financial advisers now have to product an annual fee disclosure statement (FDS), itemizing fees charged for pervious year and proposed fees for the ensuing year. Calculations will be hard, because fee information for each client does not reside on one system and currently, no available software can easily amalgamate these systems In many instances, it will be the first time that the client will know what they pay for and the adviser will have to articulate what it is they have done….

7. One of the most important things with fees is simplicity and understanding Fees and Commissions • A large number of financial advisers commenced their careers as “life agents”. Life insurance companies have traditionally paid their agents and advisers a commission for recommending (selling) their products. This practice still continues... • Most life companies also offered basic investment and superannuation “policies” and therefore, when these advisers/planners diversified into investments and superannuation, the product providers built in the option of allowing the adviser/planner to charge a commission directly from the clients investment/superannuation monies

8. These are called asset based commissions Fees and Commissions • Asset based commissions can be dialled up, at the discretion of the financial planner, from 0% to 5% • They can be charged for: • rollovers/transfers, • Contributions and/or regular investment plans • One off or ad-hoc contributions • They can also be charged on the entire account balance, as an “on-going” adviser fee

9. Consider the following – a client has $250,000 in ABC superannuation fund and contributes $10,000 per year into superannuation. Fees and Commissions • After due consultation, the client’s adviser recommends switching the balance in XYZ superannuation fund • The adviser charges a rollover fee of 0.5%, an ongoing contribution fee of 1.1% and an asset based adviser fee of 0.5% • In total, this client would pay an upfront fee of $1,250, and on-going fees of $1,410 ($110 + $1,300*) * i.e. 0.5% of ($250,000 + $10,000)

10. Fees and Commissions • Alternatively, the adviser could charge a fee for service and charge an hourly rate ranging from $165 to $550 per hour (including GST). • In this fee for service model, the adviser could waive the fee for the first initial consultation (i.e. the fact find meeting) and then charge for preparing the SOA and/or for implementing the recommendations • Once the implementation has been completed, the fee for service model would necessitate that the client is also charge an upfront fee for the on going review (usually the review fee is either a flat fee for the consultation (i.e. $165) followed by an hourly rate for any further work ensuing from the review

11. FOFA has initially proposed to ban all commissions, including those paid to advises for personal insurances (life, income protection, TPD, Trauma and Business Expenses), Fees and Commissions • However, after due consultation, it was decided to not to ban commissions for personal insurances, at this stage. • Life companies that do not offer on a direct basis, but via intermediaries such as financial planners, would pay a commission that is generally composed of an upfront and an on-going component

12. Upfront commissions could vary from 110% to 130% of the premium for the first year– Under the upfront model, on-going commission would normally be about 11% Fees and Commissions • Level commissions are usually a flat 30 or 33% for each year, including the first year • Hybrid commission model vary – most companies usually offer two choice of hybrid commission – one could be be 75% upfront and 15% ongoing, the other could be 60% upfront and 20% on-going. • Stamp duty and policy fees are usually excluded from the amount used to calculate commission payments

13. The most vocal opponents of commissions has not been clients or regulators, but industry based superannuation funds and other advisers who operate on a fee for service model Fees and Commissions • The planners who adopted the fee for service model at the outset, usually had experience as accountants or lawyers – these two professions have traditionally operated on a fee for service model. • The main regulator in this space, ASIC, has traditionally had no strong views on this issue – rather, ASIC main focus is to ensure that fees or commissions are disclosed in the appropriate manner, to the client. ASIC’s view is that it is not in the business to judge whether a particular fee or commission is too high or too low – however more recently, due to debacles such as Storm Financial, ASIC’s view has altered….

14. One of the biggest issues in relation to commission has been commissions being automatically paid to advisers from a clients account balance, regardless of whether or not the adviser has actually provided any advice or service to the client Fees and Commissions • A case in point is corporate superannuation : an adviser sets up a corporate superannuation plan for an SME (i.e. a restaurant or coffee shop with 20 employees). On the application form, the adviser chooses to charge all employees a 5% upfront fee and a 1% on-going fee. • Based on this, as long as the employer contributes into the fund or as along as the client has money in this superannuation, the adviser will continue to receive commissions. • In many cases, the employee may not be aware of this and may not even be aware of who this adviser is! This was not illegal, but was certainly inappropriate and FOFA should ensure that situations such as these are less likely to occur.

15. Under FOFA, those advises who relied on passive income streams such as commission paid from corporate superannuation employee balances, will no longer be able to do so. Fees and Commissions • Instead, they will need to pro-actively target these clients (via telephone, seminars or newsletters) and actually offer them some valuable service/advice, so that these clients would be willing to sign a Fee Disclosure Statement. • Hence, there will be a more direct link between the remuneration an adviser receives (via commissions) and the services or advice that is offered to clients.

16. Fee Disclosure Statement (FDS) Fees and Commissions • From July 2013, all fees and commission will have to be disclosed in a Fee Disclosure Statement (RG245) • If the planner/adviser continues to receive a fee or commission, then the obligation is on the planner/adviser to adhere to the new disclosure regime • A FDS can be provided in a number of formats, including e-mail, letter or online. It does not have to be returned by the client. • Unlike the FSCG, the FDS must provide the actual fee being paid by the client for the 12 month period that the FDS is being sent out for... • The FDS should also include the services available to the client and the actual services used by the client • Fees must be in dollar terms and not a percentage

17. Fees versus Commissions • In conclusion, it is clear that the industry is moving towards a fee for service model • Commissions still exist, especially in relation to personal insurances, but all commissions must now be clearly and separately disclosed in the Fee Disclosure Statement (FDS) • It is very likely that there will be further changes and further legislation in this regard, in the new few years....