On 1 May, the FPA announced its intention through a consultation paper to have a fee-based remuneration arrangement as the standard financial advice model for its members from the year 2012 onwards.
The move signalled a significant change in approach by the industry body to the never-ending debate over whether to charge clients on a fee-for-service or commission basis for financial advice.
Traditionally, the FPA's stance on the subject was about choice and transparency whereby planners could adopt either model as long as the clients were fully aware of how the chosen remuneration structure worked.
The change in stance came about for several practical reasons that could no longer be ignored, according to FPA chief executive Jo-Anne Bloch.
"We introduced conflict of interest principles two years ago, which talked about separation of fees, the negotiation with the client and those issues, but it was under the principle of choice. So you could use commission or fee [and] as long as you kept to these principles that was good," Bloch says.
"But two years down the track we found it extremely difficult to apply those principles to commission-based advice because it's very difficult to split a commission, it's very difficult to disclose the commission on a regular basis and it's certainly very difficult to switch off a commission."
While the ability to choose a particular remuneration structure was seen as a good thing by people in the profession, the public was unable to see the merits of it. And this continuing negative perception of commissions was another catalyst for the association shifting its support to fee-based remuneration.
"Choice is a good thing, but the community wasn't seeing it as a good thing," Bloch says.
"Whether you like it or not, the fact is commission-based remuneration is now so deeply entrenched as an adverse negative we can't get beyond it. As much as we all try to explain our way around how efficient it is, and it's tax deductible, and clients like it and all the rest of it, the fact is when you do research and you talk to consumers, when you see the media reports, and talk to some of our members, commission has not served and is not serving our industry very well from a reputation point of view."
There was also increasing demand from FPA members wanting the association to move away from commission-based advice as more of them were adopting a fee-for-service model as they were growing tired of having product providers having a hand in how they were being remunerated.
A final motivating factor for the FPA to support a transition to fee for service was the desire for the professional body to be proactive about the issue due to its own concerns the government and industry regulators would eventually legislate this change.
The FPA is encouraging financial planners to submit their thoughts about the move before 30 June.
So far it has received 100 submissions, with the majority supporting the initiative.
"The response has been far more favourable than might necessarily be indicated in the media. We're finding strong submissions in favour and against and some very good submissions focusing on some specific issues like corporate superannuation, life risk . we've had recommendations on charging structures and definitions so we're finding quite a few members are really looking into the detail and providing very valuable feedback," Bloch says.
A few of the major dealer groups are still finalising their submissions, but most seem to be in favour of the association's proposal.
"Anything that can actually improve the confidence of consumers in the Australian public in financial planning and planning as a profession should be seen as a positive," AMP financial planning and advice director Steve Helmich says.
MLC-owned dealer group Godfrey Pembroke introduced pure fee-for-service remuneration structures for all new clients in 2006, so it is logical the wealth management arm of National Australia Bank would support the FPA proposal.
One area in particular where the move will have an impact is when investment schemes collapse, such as Westpoint and more recently Timbercorp and Great Southern, according to MLC advice solutions general manager Greg Miller.
"By going to a fee basis and agreeing that with a client across all the things you are doing for them takes away a lot of the questions that can be asked when something goes wrong. So it does allow for a discussion about the merits of the investment and not what incentive was paid by the product manufacturer around this," Miller says.
"It means the discussion goes from what is a product manufacturer paying the adviser to sell something to what value am I adding in my advice discussion with you."
However, Professional Investment Services (PIS) managing director Grahame Evans remains sceptical about the move and believes free market forces should be left alone to allow consumers to make the ultimate choice as to how they would like to pay for financial advice.
"It is a free market out there and if you don't like the way somebody charges you, whether it's for investment advice or for any other service, you can go somewhere else and I'm not quite sure that message is being communicated. It's not as if people are locked into having to deal with a particular planner and it's all established at the outset," Evans says.
In addition, he rejects the argument from people outside the industry that remuneration via commissions leads to poor financial advice.
"In my 35-odd years in this industry that's a load of nonsense. There are plenty of people out there who charge fees and provide poor advice, and I just think that it's an easy shot to take because from a theoretical perspective there is potential for conflict around whose interests you are serving because of where you get paid. But from a practical sense I think that's completely wrong," he says.
"One of my advisers who is retiring summed it up when she said to me 'Grahame, ethics and morals are who you are and not how you get paid' and I think that's exactly the situation."
The attempt to phase out commission-based remuneration will affect a large number of financial advisers in the industry as they will be forced to re-evaluate their business structure and their entire value proposition to clients.
However, it is unlikely to cause the degree of upheaval to the profession that at first may appear to be the case when looking at the proposal on the surface because indications were that the profession would have to move in this direction sooner or later anyway, Bloch says.
"I cannot image it would [cause great upheaval] and I think the announcement of the super review and the parliamentary joint committee inquiry and the fact that they are all focusing very, very squarely on commission-based advice indicates that even if our focus is only on our membership, remuneration change will actually occur across the board," she says.
And it would appear the largest dealer groups in the country also recognised this evolution in remuneration structures, with all of them of the opinion the initiative would cause minimal disruption for their organisations.
"The impact on PIS will be quite minimal because most of our people are actually on a fee-for-service basis now . it's not going to be a big step and we're adaptable to change, as is the whole industry," Evans says.
Helmich echoes this sentiment in regard to the implications the move may have for AMP Financial Planning.
"I don't think the effect on us will be great as I look at it because I know we have 62 per cent of our planners who actually have registered fee-for-service schedules. But even the balance I know negotiate their fees with the client and that's fully disclosed, so it's been a situation where I suppose we've been trending and moving that way for quite a while anyway," he says.
Planners in the Axa Financial Planning network, which includes Charter Financial Planning, have already looked at adopting a fee-for-service remuneration model.
"The change will not be that significant at all given over 90 per cent of advisers are already using a fee-for-service model in any case, and that's been an enormous amount of change for us over probably from the start of the Financial Services Reform Act with it ramping up from 2004 onwards," Charter and Axa Financial Planning national manager Paul Williams says.
Notwithstanding the situation within the larger financial planning groups, many advisers currently practising in the industry will be looking at having to switch remuneration models.
So how difficult will this change be to perform?
As long as the new remuneration structure applies to new clients only to begin with, as it did when Godfrey Pembroke adopted this type of structure, Miller says the implementation will not be all that painful.
"Over time you can convert existing clients, but if you start it for new clients, it's not that difficult. It's a matter of thinking through what is the value proposition you are going to put forward and what is the right remuneration fee structure you need to put in place for your clients across various different circumstances," he says.
"The adviser has to understand what they need to get from the client to cover both the value they add and to cover the costs it takes to provide that advice."
Williams is not of the opinion that changing remuneration structures is an easy thing, but agrees the client value proposition is extremely important.
"I won't say it's easy. It's easier once an adviser is very clear around their client value proposition. Where advisers don't have a strong enough value proposition it will be harder for them," he says.
While the larger dealer groups seem to be well on their way to having their authorised representatives operating on a fee-for-service basis, there is still a proportion of their practitioners that is yet to change.
Although the FPA has since stipulated that existing members will not be expelled from the association if they do not comply with the proposal, as long as a suitable transitional period can be established, just about all of the major advice networks are adamant all their advisers will make the change.
"We're a principal member of the FPA and it will be our intention to comply with their standard as a principal member," Helmich says.
PIS also confirmed its advisers would fall into line with the FPA's new rules.
"From an industry perspective if we were required to do so I'm sure that's where we would be. If the industry says we got to go fees, then we'll go fees," Evans says.
With advisers potentially being forced to fall into line with the new FPA standard, resistance from some planners realistically can be expected. From this perspective, Evans says the industry, and subsequently the consumer, could ultimately suffer as a result of the initiative.
"I'd hate to see people leave the industry just because of a theoretical debate around whether a commission compromises your advice or not," he says.
The profession in other countries has already experienced this type of reaction in response to moves like the FPA's, he says.
"Intelligence tells me . in the UK where they are doing something similar that there is expected to be a massive amount of people leaving the industry," he says.
In some respects the change may be seen as a generational transition with expected resistance coming from some of the older advisers in the profession, he says.
"Some people might say 'well, some of these people are dinosaurs', but I don't subscribe to that theory. I still think in respect to experience the old heads who have lived through a whole range of different economic circumstances can provide some stability to some of the issues people face," he says.
"The reality is that sub-prime and some of the financial engineering experienced in the finance industry was done by younger people who were focused on the wrong thing, and we need to keep some of that experience in the industry and that will actually help mentoring the newer people coming through."
Any significant change in the operation of an industry will usually come with costs of transition and implementation of any new systems required to facilitate the change.
In this instance, the larger dealer groups do not see that as being a problem for their advisers and as such could not see the situation as being one that would potentially drive up the cost of advice.
"Bigger dealer groups like us have already got the fee charging system in place and the invoicing system and the management of that doesn't cost us any more so I can't see that being a problem for us," Evans says.
But for smaller dealer groups or independent advisers, it could be a different story.
"For people who are not as big as the likes of ourselves, it may be a costly exercise if they've not had to do that in the past. But I would be very surprised if most dealer groups of any reasonable size, I'm talking with 40 or 50 advisers number wise, haven't got a structure in place already," Evans says.
While there may not be any additional expenses for dealer groups as part of the exercise, he says the phasing out of commissions may still end up driving up the cost of advice, which may in turn have further consequences for the financial planning profession.
He uses the example of a planning practice that had 370 clients but just under 300 commission-based clients that contributed on average $90 a year in revenue.
"In this instance the larger clients are subsidising the smaller clients because the practice can afford to service all of them. In a fee-based structure that will disappear and that poses a problem for those people who are looking for advice on an affordable basis," he says.
"The natural knock-on effect of this to me is the consolidation of practices, the dumping of smaller clients or asking them to pay substantially more than they are currently paying, and that then creates a problem for the industry overall," he says.
Helmich says additional costs incurred as a result of the move would not be likely to fall upon financial planning practices, but instead be borne by other sectors of the financial services industry.
"I think the costs to make the change will really lie with the product manufacturers because they have the product systems, but when I say costs it might be insignificant costs. It depends on how their operating system is and what their technology platform is," he says.
"I suppose I've come to know over the years that every time the government makes a change the product manufacturers do have to stump up some dollars to make the change."
With product manufacturers having to play a role in facilitating the move to fee-for-service remuneration, internal relationships of organisations whose activities include both manufacturing and advisory business arms could be affected.
Axa and AMP are in this situation and agree the internal impact on their operations will not be significant.
"I suspect there won't be much change at all because any of the products in any case have the ability for advisers, if they wish, to dial down completely any trail commissions and charge their own advice fee. So no, I don't expect much to change at all," Williams says.
Helmich agrees there will not be much change within his company's ranks, mainly because the different business arms operate separately.
"AMP Financial Planning doesn't run with product targets or anything like that at all. It's got a very broad approved product and services list which has both non-AMP and AMP offerings on there," he says.
"So I think our product manufacturing arm is very attuned to the way the world is going and they'll align with it."
In the past, the debate over the different remuneration models has been clouded by involving the method of collection rather than the charging structures alone, potentially showing a lack of understanding of the real issue at hand.
It has led to the FPA, as part of its recommendation, to specify what it considers a commission and what it does not.
The association defines a commission as a payment made by the product provider to the financial planner, through their licensee, for recommending the product, or in the case of a trail commission, for ongoing service as well.
"There have been so many different views to this, which is why I have had to have debates that an asset-based fee paid for by the client is actually quite different to a commission. One might be a percentage sure, but one actually comes from the client; the other comes from a product. I don't know how more different you can get," Bloch says.
Axa has also recognised this confusion and has formulated guidelines to help its planners better understand that fee-for-service remuneration is not synonymous with an upfront payment.
"We have guidelines, but it wasn't mandated as to how they should collect their fees. We developed an online payment mechanism to better support fee for advice about four or five years ago that included monthly direct debits, credit card payments or monthly invoicing," Williams says.
"It's made it easier to administer the payment for advice and has helped with the change as it has also resulted in greater efficiencies in their businesses as well."
AMP has also given its advisers some assistance in this area. Not only has this helped the transition process, it has also dispelled any concerns over whether or not fee-for-service advice limits a client's payment choice.
"We help them with setting fee schedules and how to operate, and we've got a system for advisers to collect their fees through various means," Helmich says.
"One of the good things is there is still the opportunity for them to offer choice to consumers because when you're talking about moving to fee for service it doesn't mean everyone is going to cut a cheque. With fee for service you can still collect it through the platform and I think that should always be there.
"It's a great way for people to actually pay for a service over a period of time and really understand what the value of advice is."
To enable the initial stages of the proposal, the area of life insurance and risk has been deferred as the products in this area will need special consideration as they are currently all commission based.
Excluding insurance, the FPA has suggested the change in remuneration structure for its members be implemented by 2012, but has indicated it is still open to recommendations on what a suitable transition period might be.
Surprisingly the FPA has already fielded criticism in regard to this suggestion.
"We've been criticised for taking too long and there is a view that 2012 is just too far down the track. We want to debate the issue, but we don't have a hard and fast date in mind. We suggested a date so we could think about it and it would prompt the debate, but we do feel we need to give people plenty of time as this is not a good time at the moment to implement dramatic change," Bloch says.
But given the separate treatment recommended for insurance, the desire to achieve the change by 2012 seems to have been looked upon favourably by some parties.
"I don't think it's unrealistic actually. There will be some challenges and I think the challenge will be in relation to insurance advice. But fundamentally I don't think the time frame is unreasonable," Williams says.
"We'll want to see clarity on some of the legacy products that perhaps don't have as much flexibility to dial down a commission and things like that and that could pose a timing challenge."
Helmich also thought the move could be achieved within the given time limit.
"I think it's very manageable. I think it gives people a lot of notice; over two years' notice. That means product manufacturers can adjust their systems, there will be some costs involved there, and licensees will be able to take planners on a journey through a change management process," he says.
In contrast, Evans says he wants to know more about the methodology for selecting the date before he makes a decision on the practicality of it.
"It's good to be able to actually say this, but then there is the implementation and I just wonder how much work has been done on what would be the implementation for this time frame. Is this a date they picked out of the air or have they spoken to a variety of advisers?" he says.
