Does RG 175’s new Conflicts Priority Rule spell the end of asset-based fees? Not in all cases, but some rethinking will be required
At its simplest, the best interests’ duty prevents advisers furthering their own interests over those of the client when giving advice.
What does this mean in practice? Quite a lot. For example, according to the new RG 175:
- Clients must be given non-product-related solutions where appropriate, even if that means the client is less likely to need future advice, for example advice on debt reduction or Centrelink benefits.
- Advisers mustn’t recommend a product or a service to create revenue for themselves unless they can demonstrate additional benefits to the client. This applies to strategies or products and even to the services themselves. For example, they can’t recommend an unduly complex strategy that will require ongoing advice if the client is unlikely to seek ongoing advice or be able to afford it.
- Advisers can’t accept remuneration that would reasonably influence the financial product advice you give (unless it’s grandfathered).
- But even if the remuneration is grandfathered, the advice isn’t. For example if an adviser recommends a client continue to use a platform when other better solutions (which would not be grandfathered) are available for the client, this would be a breach of the best interests duty.
Almost all the examples in the new RG 175 use a scenario where advice other than a product recommendation is most suitable for the client. Surely this is ASIC sending very clear message that a pure product focus needs to be a thing of the past?
So what does this mean for asset-based fees? ASIC takes the view that asset-based fees incentivise advisers to recommend strategies and products that maximise the assets they manage for the client.
It feels a bit like the anti-smoking legislation. Smoking is not actually banned, but it’s becoming increasingly difficult to smoke anywhere. Just recently NSW banned smoking in places like transport stops and entrances to public buildings.
Advisers aren’t specifically banned from charging asset-based fees either – but if this is the only charging model you have, you’ll risk either falling foul of the Conflicts Priority Rule or not being adequately remunerated for your work.
If you’re not actually managing a client’s assets or you’re only managing small amount of them, an asset-based fee may not adequately remunerate you. You’ll need a fee structure that remunerates you for the work you do. So we think there’ll be a trend away from 100 per cent asset-based fee structures.
Of course, you can – and most advisers will – use asset based fees where they are appropriate. For example where you provide an ongoing service and manage the clients’ assets, asset based fees will be suitable and easier to administer.
But if the advice the client needs is not product-related – and ASIC has made it clear that the best interests’ duty requires advisers to provide non-product-related solutions where appropriate – other forms of charging will be required. It’s likely that advisers will have a menu of options. Many advisers do this already – indeed some have moved completely away from asset based fees.
So what should advisers be doing to prepare for the new world order?
- Identify the conflicts inherent in the way you currently advise clients. You’re probably not the best person to do this as you’re likely to be confident that there aren’t any. So get some advice from someone outside your business who can shed new light on things – and who understands the way ASIC is approaching best interests.
- Reconsider your fee structure. How will you charge clients who need advice but don’t want or need you to manage their assets?
- Develop an engagement process and engagement letters that makes your service proposition and the client’s fee commitment clear from the minute the client walks in the door. You’ll be amazed at how much easier it will be to manage the financial aspects of your client relationships
