A time for pragmatism

While some might suggest that the Financial Planning Association (FPA) was foolish to voice the view that the time has come to call an end to the grandfathering of trail commissions, the objective evidence from the Royal Commission, the Government and the Federal Opposition is that it is being entirely pragmatic.

While the Association of Financial Advisers (AFA) was being entirely accurate in its assessment of the declining influence of trailing commissions on total adviser remuneration, the financial planning industry must wake up to reality that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is likely to make a continuation of grandfathering politically unsustainable.

Indeed, the political unsustainability of grandfathered trail commissions has been highlighted by the degree to which Royal Commission testimony from the likes of AMP Limited and the Commonwealth Bank served to suggest the industry was littered with instances of major institutional players gaming the grandfathering rules to sustain their revenue flows.

While AMP and the Commonwealth Bank have filed submissions with the Royal Commission further explaining their practices, the fact remains that systems and practices were put in place which, to any objective outside observer, bore all the hallmarks of being grandfathering-based revenue-protection strategies.

If and when the Royal Commissioner, Kenneth Hayne traverses these issues when making his first-round recommendations in September, financial planners can expect no sympathy from either the Government or the Federal Opposition. Indeed, they should expect entirely the reverse.

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In successive statements responding to the testimony given to the Royal Commission the Treasurer, Scott Morrison and the Minister for Revenue and Financial Services, Kelly O’Dwyer have been quick to condemn those at the helm of the major financial institutions while the Federal Opposition has been similarly scathing.

So, if Royal Commissioner Hayne recommends an end to grandfathering, financial planners need to ask themselves who, of influence, will be prepared to argue the contrary in what is already building as a highly volatile election year. It will certainly not be any of the major political parties and the FPA has already signalled its resignation to the apparently inevitable.

The risk for those organisations which choose to pursue campaigns in defence of grandfathering and trail commissions is that they will be portrayed in a generally hostile media as regressive, unprofessional and ready to defend some of the worst shortcomings revealed by the Royal Commission processes.

But what will be crucial is that the industry unites to ensure that whatever regulatory regime and industry structure emerges in the aftermath of the Royal Commission accommodates the realities, complexities and nuances of the industry, particularly with respect to life/risk insurance advice.

As difficult as the likely changes may prove to be for financial advisers it will prove to be particularly problematic for life/risk advisers who are required to not only recommend particular products to their clients but to assist those clients with navigating the complexities of those products in the event of them making a claim.

Changes will be certain to occur as a result of the Royal Commission and while it would be a folly to defend the indefensible the industry must unite to ensure a workable future.