THE DO’S AND DON’TS OF CONFLICTED REMUNERATION

Any remuneration or other benefit paid by a product provider that could influence the financial advice or product (other than most risk insurances) that an adviser recommends to retail clients, is likely to be banned under the FOFA reforms.

Advisers who believe that commissions don’t influence which product they recommend or whether they recommend a product, will need to be able to back this up with the facts.  Because any volume based benefit paid by a fund manager or platform, such as a fixed percentage of funds invested, will be presumed to be conflicted going forward. You can only accept these if you can demonstrate that they could not reasonably influence your advice. And you need the evidence to support it.

Here’s a quick snapshot of what’s in and what’s out…..

What’s out?

• Upfront and trailing commissions paid by funds managers or platforms to AFS licensees or advisers.
• Volume based bonuses paid by funds managers or platforms which depend on the number or value of financial products acquired by clients.
• Asset based fees on borrowed amounts.
• Marketing fees paid by fund managers or platforms to AFS licensees for preferred access to their advisers.
• Discounts on or waivers of fees payable to their AFS licensee by an authorised representative the amount of which depends on the amount of client funds held in a product or platform.
• Payments by AFS licensees to their advisers for the cost of business equipment or other expenses which are contingent on the content of the advice provided by the adviser, how clients act or the value or number of products acquired by clients. Happily, genuine reimbursement of these expenses is acceptable.
• Business assistance, business services, hospitality – other than in extremely limited circumstances.
• Financial support such as shares in a product issuer or loans on preferential terms.
• Equity arrangements in an AFS licensee business that enable shareholders to receive dividends or profit shares if they could influence the advice provided by the shareholders or their advisers.
• Buyer of last resort arrangements if the amount paid is related to the number or value of the buyer’s products recommended by the adviser.

What’s in?

• Benefits received on condition that they’re passed on to the client in full, provided they’re passed on as soon as reasonably practicable and within 3 months of receipt.
• Benefits paid to an AFS licensee (and not passed on to their advisers) which are used to pay for the licensee’s operating expenses. Alternatively, the benefit can be passed on to an authorised representative to help pay for their operating expenses but the authorised representative can’t pass on the benefit to any individual client advisers. But there’s a catch. The AFS licensee need to be able to show that it has robust policies for platform and product selection, a diverse range of platforms and extensive list of products that advisers can potentially recommend to clients and that the advisers do not select these based on the potential value of the benefit to the group.
• Infrequent benefits worth than $300 in total from anyone provider – and you need to keep a register of any benefits exceeding $100.
• Training and education where at least 75% of the time is spent on training and the adviser pays for their own travel, accommodation and meals.
• IT software and support that’s related to a provider’s products.

Although there’s no grandfathering for investments made under arrangements entered into after 1 July 2013 with product providers and platforms that are, the good news is that there’s still plenty of time to reorganise arrangements that are put in place up that date .

Here’s  how grandfathering works with those….

*Limited switching means moving between generic investment risk options, e.g. from ‘growth’ to ‘balanced’,

There’re 2 exceptions to this:

• There’s no grandfathering to any benefits given after 1 July 2013  where the amount or entitlement to the benefit  is at the discretion of the platform or product provider– it doesn’t matter when the arrangement for the benefit started – it’s conflicted.
•  And asset based fees on borrowed amounts can’t be charged on borrowings used to purchase financial products after 1 July 2013.

See The Fold’s White Paper: Everything You Need to Know About…. Conflicted Remuneration  for a complete guide to the ins and outs of this complex area.