Money for nothing (and the tricks are fees)
Fees for "no service"
I expect that any adviser or small licensee that’s struggled to issue Fee Disclosure Statements would have been shocked by the extent of the “fee for no service” (FFNS) practices within some of the larger Licensees.
The Royal Commission into Misconduct in Banking, Superannuation and Financial Services exposed Licensees' conduct that shows contempt for both consumers and the law. Licensees' confected contrition aside, their ‘gold medal’ revenue generation strategies have further eroded their social capital and generated a wave of consumer outrage that is entirely justified.
That's bad enough, but those advisers that have worked hard to build sustainable businesses supporting their clients and servicing their needs, may find themselves collateral damage in this War of Accountability.
In ASIC’s latest submission, the Regulator has focused their attention not on ‘vertical integration’ or incentives, but on the on-going service model. Based on, what the FSC might consider an ‘unrepresentative sample’ of CBA, AMP and ANZ, ASIC are concerned that clients may not receive any ‘meaningful benefit’ for the ongoing service or any benefit proportional to its cost.
While we have a more nuanced view of the value and purpose of ongoing support, there’s little doubt that the Royal Commission has landed a telling blow. Apart from the Institutions’ significant ethical failures – “I charge dead people” – their failure to identify these breaches (or manage them in accordance with the law and their own processes and procedures) suggests more profound compliance failures than those they admit.
What's the cost of an annual review?
We’ve long argued against the dangers of confusing cost and value; but we’re well aware that the same argument can be used to rationalise egregious conduct. In her evidence on the nature of the ongoing services available through CBA’s Licensees, Ms Perkovic stated that the offer of an annual review is sufficient to charge an ongoing fee, which is generally calculated as a percentage of funds under management.
Anthony Regan from AMP stated that AMP’s Licensees practices and fee structure were much the same. Nigel Williams from ANZ confirmed that theirs were broadly similar, but their service offering also included an option of a flat dollar amount dependent on the scope of services offered as well as the popular percentage-based fee.
The appropriateness of asset-based fees has been a perennial issue for our industry.
While asset- based or volume-based fees are completely or generally prohibited for shelf-space or borrowed amounts, ongoing service fees have generally escaped notice. Some licensees argue that it aligns interests and ensures that those clients whose complex arrangements require more support. Critics allege that an asset-based fee, simply allows licensees to parasitically, and passively, benefit.
ASIC’s position is somewhere in the middle. Traditionally, they have focused on the conflicts of interest asset-based fees create and the way they can bias the adviser’s recommendations.
In “SUBMISSIONS OF THE AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION ROUND 2: FINANCIAL ADVICE”, ASIC address the issue directly.
In their submission, ASIC offer the opinion that the ‘mere offer of an annual review’ cannot reasonably justify a significant ongoing service fee.
Leaving ‘significance’ aside for a moment, ASIC are signalling that taking “reasonable steps” to offer an annual review is neither adequate nor sufficient to support the charge. Other more critical voices might suggest that charging a fee, for services that are not, in fact, provided, is fraud.
In addition, ASIC opine the costly annual review, even if it is provided, may be of limited value to many of the customers whose investments are not sufficiently volatile or complex enough to warrant the service.
In our view, this position shows a fundamental misunderstanding both of the value of ongoing service and consumer needs. The ‘value’ of the annual review to the client is often not the rearrangement of their portfolio but the reassurance that they remain on track and that their arrangements remain suitable for their needs.
The collection mechanism
ASIC are also concerned by the method by which the fee is paid.
ASIC believe there are a number of elements to this equation and meaningful value would be more likely if the fee payable for the review was invoiced and specifically authorised when provided, rather than deducted automatically from investment funds.
In some respects, advisers might prefer this arrangement too – because it may, in fact, spare them from the need to issue Fee Disclosure Statements.
Some are concerned that the current practice of disclosing deducted fees through the FDS does not adequately alert consumers to the fees they are paying for the services they received or are entitled to receive.
In principle, there's little problem with advisers charging a fee for the annual review after providing the annual review. In practice, many businesses are simply not prepared to pivot their financial model. If you consider that the Banks' conduct, and the FFNS publicity, will be enough to catalyse legislative and regulatory change, it may be better to anticipate the change and start to turn your business around now.
Your call to action
1. Prepare a list of your ongoing-service clients. Forget about service levels, complexity or platform, just prepare a list of every client that has engaged you to provide ongoing services.
2. Define – in detail – what the ongoing service involves. If the service involves a review, what does the review look like? How long does it last? How is it documented? How is it confirmed?
3. Identify where, and in what detail, your ongoing-service offer is documented. Your ongoing-service offering is a contract between you and your client so it’s important that you’re clear what the services involves and that you’ve presented it consistently. Review your Letter of Engagement, Financial Services Guide, Statement of Advice and website.
4. Model the cost – in terms of time, resources and money – of providing the services (2) to the relevant clients (1). Assess whether your model is sustainable and whether the sustainability of your model depends on clients not receiving the ongoing services. For example, you may find you’re not charging enough or don’t have enough staff to actually provide every client with an annual review.
5. Review your ongoing-service model. Is it sustainable? Does it limit your growth? Does it provide value to your clients? Does it impose additional burdens on your business without providing additional benefits? Would a pure ‘fee for service’ model be a more efficient and effective model.
6. Review, revise and republish your:
a. Incident management policy and processes (you don’t have two years to consider whether a contravention is a breach).
b. Letter of engagement (to better define a ‘review’ and ongoing services).
c. Statement of Advice template (what do you promise you’ll do on a recurring basis).
d. Monitoring and supervision arrangements (more focus on ongoing advice)
As a final step, investigate whether you've provided the ongoing-services that you were contracted to provide. If you have not, consider how that failure can be appropriately remediated and whether the failure is a reportable breach. If it's reportable, report quickly, clearly and openly.
If you are unsure, seek legal advice (but don't ask your lawyer for more than 24 re-writes).
If you think you need assistance, you can rely on Assured Support.