The flood of financial incentives across Australia's financial planning industry could cause long-term damage, with incentives such as sign-on bonuses and payment advances said to be unsustainable in the years ahead.
A number of advice executives, speaking on the condition of anonymity, told InvestorDaily greater attention needed to be given to payments advisers and advice groups were receiving amid the recruitment war between Australia's big five wealth institutions.
One of the executives questioned the recruiting activities of the institutions, stating the rumours of upfront payments of $250,000 to $600,000 in sign-on fees for new recruits were accurate, with the overall cost of "poaching staff" being "significant" to wealth managers.
He said such payments were surprising, particularly given Australia's $330-billion-plus wealth management sector's poor performance this year.
Australia's big five banking groups - Commonwealth Bank of Australia, National Australia Bank, ANZ Banking Group, Westpac Banking Group and AMP - suffered losses to their wealth divisions.
Last month, ANZ was forced to reaffirm its commitment to its wealth business, OnePath, and deny it was up for sale, despite the division returning soft results for a second consecutive year.
A second executive questioned whether the recruited advisers joined the wealth manager with "an open APL (approved product list)".
Another executive queried whether the sign-on bonuses and advances in payment being offered across the industry were merely soft dollar payments and therefore created a conflict of interest in light of the government's Future of Financial Advice (FOFA) reforms.
Under the FOFA reforms, it is proposed that soft dollar payments under $300 would be banned.
Financial services industry consultant Wayne Wilson said a difficulty currently existed in distinguishing between the types of payments being made in the industry.
Wilson said one type of payment being made in the market was to "pre-pay volume bonuses that are going to come under grandfathering".
"Companies may offer to make a payment based on the next three years' volume bonuses that are due on a book of business and they might offer to pay one or one-and-a-half years as a capital payment," he said.
"I wouldn't consider that to be a soft dollar payment per se. It's really just capitalising a revenue stream that's already in existence. It's not making money go anywhere; in actual fact it means money has got to stay where it is."
Payments that were harder to argue the case for were straight incentive payments for an adviser to move, he said.
"You're starting to get into that area of offering money to persuade an outcome and you can imagine that there would be circumstances where that persuasion wasn't necessarily in the long-term best interest of the adviser's underlying clients, but you'd need to look at each one individually," he said.
Another concern for the industry was that the payments currently on offer were unsustainable, he said.
"Mid to long term, margins have got to go down. Every fundamental that's driving the market tells you that margins are going to have to go down," he said.
"So in terms of buying a current revenue stream, which is what a financial planning business is, you've got a very negative outlook on growth in terms of markets for the next three to five years and you've got margin pressure.
"So if the market isn't driving up the value of your funds under advice, which it traditionally has, and if you've got margin pressure driving down the average margin that you're getting on funds under advice, then the very nature of the financial planning practice's revenue and profit over the next decade will be fundamentally different to what it has looked like in the last two decades, putting aside the GFC (global financial crisis)."
FPA chief executive Mark Rantall said the payment incentives needed to be managed, displayed or avoided, depending on what they were and the impact on advice.
"We've seen many of these sorts of programs operating over a number of years. The question we're more interested in is does it have a negative impact on advice? I suggest that it probably doesn't on prima facie," Rantall said.
"As long as the financial planner is putting the client's interest ahead of their own, then the commercial aspects of the business that sits behind that shouldn't have a negative impact on the client. The main thing is to ensure that clients' interests are put first.
"Provided that is being done, then clients will end up with the appropriate advice."
