Passing the adviser exam is critical to staying in the industry but it’s not the biggest challenge heading the way of licensees and self-employed financial advisers.
How to structure advice services and remuneration into the future will be a challenge soon to be faced by commission dependent advisers. And this is not only about the loss of grandfathered commissions.
The government has recently made it clear that it is pressing ahead with the implementation of the Hayne Royal commission recommendations.
New legislation is on its way that will further restrict the ability of advisers to be paid by means other than the client.
However, the sleeping giant among the Hayne Royal Commission recommendations is # 2.2 – Disclosure of lack of independence, which has the potential to hit advisers and licensees like a horseshoe in a boxing glove.
Current law (Corporations Act) forbids advisers from using words like ‘independent’ to describe themselves or their businesses unless certain criteria are met. These criteria are set out in s923A and RG175.64-89 and involve strict remuneration conditions, including the treatment of commissions received.
Currently, advisers are still permitted to receive initial and ongoing insurance commissions provided they are all rebated to the client in full under the conditions set out in RG175.79-81. This includes crediting initial and ongoing commissions in full against a client fee agreed before the commission is received.
It is unknown at this stage whether the proposed s923A amendment will require the lack of independence disclosure to be made as a note in the FSG or as a separate disclosure document to be acknowledged and signed by the client prior to the provision of advice.
If it’s the latter, the effect may be the powerful enough to motivate financial advisers to choose whether to walk away from insurance advice, leave the industry or become independent advisers.
Because it is being driven by government legislation, the advice supervision authorities are likely to promote the client benefits of adviser independence in their efforts to restore community trust in the industry.
The designation Independent Adviser could well become the industry gold standard.
In a few short years, the financial advisers could find themselves on notice to either make the change to independence or be squeezed out of the industry.
Furthermore, the government could ultimately force the issue by fully implementing recommendation #2.5 of the Royal Commission Final Report that the cap on life risk insurance commissions be ultimately reduced to zero.
This would effectively remove the last non-client income source and, although it would severely damage the risk insurance industry in Australia, and the value of associated commission-based books of business, remaining advisers would have no option but to become independent.
And it gets worse. You see, the independence issue won’t be just confined to advisers and advice practices. It will also become a problem for licensees.
The reason is that, as RG175.67 Example 1 shows, an adviser who meets the s923A criteria is still unable to use a restricted term such as ‘independent’ while ever their licensee or any other adviser in their group continues to receive a commission.
The effect of this is would be that the task of meeting the independence criteria will need to be undertaken as a licensee group.
The groups with the most work to do will be the larger licensee groups and those with a heavy bias towards risk insurance. Each group as a whole will need to coordinate and work together to bring about the change.
The smaller boutique licensees are likely to make the change early and then will only accept advisers who meet the independence criteria, whilst excluding and expelling those who don’t.
Conversely, practitioners who qualify as independent advisers but can’t use the term, will actively seek out independent licensees.
Unfortunately, the race for independence is likely to become a real life game of musical chairs where many self-employed advisers might not be able to find a licensee willing to accept them.
To exacerbate the problem, introducing fee-for advice and moving away from commission-based income models, is not going to be achieved overnight. It takes time to transform an adviser’s business from a product intermediary service to a fee-based advice practice.
It is a cultural and attitudinal shift that involves a complete rethink of the business.