While the financial planning industry has undergone a raft of recent reforms, one of the most significant changes has been the abolition of ‘grandfathered commissions’, effective from the start of 2021.
Grandfathered commissions cover a variety of fees paid directly from a client’s account by the product provider. In some cases, the client was aware of the fees they were paying, but in many, the client was not, and this is where the problem lies.
The Federal Government effectively banned these types of payments as part of its broader Future of Financial Advice or FOFA reforms to the financial planning industry in 2012.
Under this legislation, certain fee arrangements that were already in place were effectively ‘grandfathered’, or allowed to continue, on the expectation they would slowly die out as clients changed or updated their financial arrangements.
However, in 2019 the consumer watchdog, Choice, estimated more than $2 billion in fees were still being received by financial planners under these grandfathered commission arrangements, although other analysts estimate this number was closer to $400 million.
Regardless, the Haynes Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, recommended all grandfathered fees or ‘fees for no service’ as they became known, be stopped immediately and this was subsequently legislated to take effect from January 1, 2021.
Just as grandfathered fees varied from client to client, so to have the impact of these changes. Some clients will see their fees charged for financial advice or a financial product fall, while others will see themselves moved into new, better financial products.
Where the grandfathered commission is embedded into a financial product, the product issuer is required by law to ensure they will provide a cash rebate or a reduction in fees to the customer. Product providers are not allowed to simply absorb the banned fees.
The legislation provides that no client will be worse off under the proposed changes. It includes provisions for tax relief for any unintended adverse tax consequences, and Centrelink benefits are also protected from any detrimental consequences.
All financial planning clients will now receive clearer information about exactly what fees they are being charged and with that, exactly what services they are being provided, by way of an annual fee disclosure statement.
Along with this, financial planners and their clients will become more engaged with each other and should have at least one formal review meeting a year with their adviser.
This reform is intended to ensure clients have a more detailed understanding of exactly what fees they are paying for financial planning advice, as well as an understanding that they can stop paying those fees at any time if they do not believe they are receiving value for money.
Some clients will start paying their financial planners directly for the work they do on their behalf by way of a straight up invoice while others will see different variations in the way their adviser charges for their services.
While fee arrangements may vary in detail from one business to another, the fee-for-service regime will be easier-to-understand, transparent and give clients greater confidence that their adviser is acting and providing advice that is always in their best interest.
At Wealthpath, our fees are transparent and fair. We get great satisfaction from seeing our clients achieving their goals, and that is our primary purpose! Get in touch today to see how we can help you achieve your financial goals.
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