Speaking at a parliamentary inquiry into the four major banks, Labor MP Matt Thistlethwaite said that, following the recommendation by the royal commission to ban grandfathered commissions, financial advisers have raised concerns about advisers who have purchased advice firms on the basis that trail commissions would form part of the profits of that business.
The final report of the royal commission recommended repealing the grandfathering provisions for conflicted remuneration and introducing an annual renewal requirement for the deduction of any advice fees.
Following the release of the final report, Treasurer Josh Frydenberg announced that the government would repeal grandfathered grandfathering provisions for conflicted remuneration on 1 January 2021. Labor plans to end grandfathering of conflicted remuneration a year earlier, from 1 January 2020.
Mr Thistlethwaite said there has been sales of advice businesses where the people purchasing the business have bought it on the basis that grandfathered commissions would continue.
“I recently had a financial planner come up to me at an event and say: ‘You guys have got it wrong with grandfathered commissions. In a lot of financial planning businesses, people had borrowed money to buy the business on the basis that the grandfathered commissions were part of the profits of the business, the structure of the business, and the reason why they bought into that particular business’,” he said.
Mr Thistlethwaite said that he had “little sympathy” for financial advisers in this situation.
“You’ve been on notice about this, and, if you’d done your due diligence, you should have known about this,” he said.
When FOFA was first introduced, he said, there was discussion in the lead-up to FOFA being legislated about grandfathered commissions.
“At the time, a parliamentary committee and the Parliament agreed to provide a carve-out for grandfathered commissions. But, in the report by the Parliamentary Joint Committee on Corporations and Financial Services that looked at FOFA, there was, very much, an indication that these things wouldn’t last forever and that a carve-out was being provided at that point in time, but the industry was on notice to look at phasing those sorts of things out,” he said.
SMSF Adviser previously reported that with some advice firms borrowing significant sums to buy adviser trail books in the past, the ban on grandfathered commissions could leave them with “catastrophic” debt levels secured by a worthless asset.
SMSF Alliance principal David Busoli previously said that trail books were often marketed to advisers as a type of rent roll that would provide them with an income stream whether they worked for it or not.
“The underlying theory was that the adviser would talk to the clients and service their business potential. The reality was that these trail books often included so many clients of little economic value to the adviser that this did not happen. So, they were often regarded as a book of passive income with a valuation based on a multiple of income,” he said.
“For someone with a $2 million loan secured by a trail book which has been funding the payments, there is a real problem. The adviser will still be liable for the debt with, probably, no real prospect of servicing it, so who will be left ‘holding the can?’”
Labor MP Matt Thistlethwaite should have been my lawyer in the family court 3 years ago when the Family Court valued grandfathered commissions in my business which resulted in my having to take out a $600,000 loan against ongoing revenue to pay off ex. Changes in play have now devalued by business enormously which will result in my working well into my late 60’s. 20/20 vision in hindsight Mark is a gift that you apparently have. He’s a prediction for you. Labor will stuff up this country again like they have every time they’ve been in office
A carve out wasn’t provided in good faith. An exemption was provided ONLY because of constitutional issues. Nothing has changed other than the government now legislating against these commission in the hope that there won’t be a constitutional challenge.
I am not fan of these commissions, but there should be an orderly exit. In Perth, the government just announced a compensation fund for tax drivers impact by their change in rules overnight.
Structural reform takes careful planning and more input from the sector/s involved. We have seen a similar issue with Taxi Drivers (Uber) and almost with Finance Brokers (Government intervention). I am no fan of commissions – I see them as a breach of independence. But if you are going to pull the rug out from an entire industry and devalue businesses overnight, you have to expect this. People have borrowed to buy a valuable business and would have bought expecting to grow it and onsell it for a comfortable retirement of their own. Instead many businesses may be forced to use their super to pay debt so they can retire and be on government benefits instead of self-funding. The economic downturn has severely impacted the value of goodwill in any case, so we don’t need further government meddling to cause financial harm. A more structured approach is required and we just are not seeing this.