Planning price overhaul

28/05/2009 - 00:00


Save articles for future reference.

THE retirement plans of some financial advisers are under threat as the potential sale price of commission-reliant practices falls.

Planning price overhaul

THE retirement plans of some financial advisers are under threat as the potential sale price of commission-reliant practices falls.

Financial planning businesses that rely on trail commissions from clients they no longer service are almost certain to lose a large chunk of those ongoing revenue streams under proposed changes by the industry's biggest representative body.

One financial planner said former insurance agents turned financial advisers were among those with the most to lose from pressure to transition to fee-based practices.

"They have a whole pile of legacy business built on commissions," the adviser told WA Business News.

Commissions derived from insurance, investment and superannuation products can deliver ongoing income to advisers for decades after the recommendation was made.

Commissions are controlled by the product provider and taken out of a client's account on an ongoing basis, as opposed to a fee, which is negotiated between the adviser and client.

A paper released by the Financial Planning Association early this month recommended its 12,000 members transition to fee-based models. One thousand of those members reside in Western Australia.

The recommendation, which contradicted the FPA's long-held defence of commissions, coincided with a federal government review of the superannuation industry, headed by long-time critic of high fees and commissions, Superannuation Minister Nick Sherry.

The government is widely expected to regulate fees or commissions charged on compulsory superannuation, should the industry not improve its standards. Senator Sherry has previously said trail commissions warped advice.

A report released by Rainmaker Information last year concluded that retail superannuation funds paid advisers $2.4 billion during 2007.

Veteran Perth planner Peter Gilkison, of Applecross-based Gilkison Investments, said the move to have planners negotiate fees directly with their clients was a good one.

"I don't think it is how the fee is collected that is the issue; it's how it is negotiated," he said.

Mr Gilkison said product providers should no longer dictate how much an adviser received in order to remove any real or perceived conflict of interest.

Gilkison Investments started transitioning clients to fee models, negotiated directly between the practice and the client, about seven years ago.

Commissions range from a few basis points to the 10 per cent upfront handouts given to advisers who recommended agribusiness schemes like those run by failed providers Timbercorp and Great Southern.

Most industry bodies have lobbied the government to allow for a long transition process away from commissions, although groups such as the Association of Financial Advisers remain opposed to any move to ban commissions, arguing it would price consumers out of the market.

The FPA told members the remuneration changes would apply to new clients from 2012.

Financial planning practices have been historically valued at a multiple of two to three times recurring revenue, which largely consists of trail commissions. Practices with a large base of dormant clients would lose those revenue streams if they were not able to make contact and transition clients - many of whom they haven't see for years - to a new model negotiated between the adviser and client.

More recently, buyers have opted for valuation techniques that also measure the profitability of a business.

Rick Maggi, managing director of Perth-based Westmount Securities, said that when valuing a practice, buyers had to take into account the risk that commissions could be banned.

"To help protect against legislative risk, I would want the key advisers of a practice I bought firmly by my side for the next two to three years, to help transition clients over to a fee-for-service model," he said.

"A hardcore commission-only practice could, however, be a renovator's delight."

Mr Maggi said Perth practices were anecdotally able to attract higher prices than east coast planning businesses due to a shortage of local practices, and an abundance of wealthy local clientele.


Subscription Options