Why financial planning commissions are on borrowed time

Even without direct legislation, a big advertising campaign by the Government will be enough to put an end to financial planning commissions, writes Mike Taylor.

The days of trailing commissions are numbered.

Financial planners would be most unwise to take solace from statements issued by the Minister for Financial Services, Chris Bowen, that there will be no legislative retrospectivity and that the proposed opt-in regime will not apply to legacy arrangements. Such statements will prove to be largely meaningless.

Sometimes governments do not need to directly legislate or regulate to achieve an outcome.

Instead, they simply create an environment in which the desired change evolves as a result of consumer sentiment and market forces. This will prove to be the case with trailing commissions.

If and when the Government implements its new financial advice regime it will undoubtedly accompany that exercise with a broad-ranging public information (TV, print and online advertising) campaign extolling the virtues of the initiative.

That campaign, in turn, will give rise to widespread commentary about the evils of legacy trails which, in turn, will see many such arrangements turned off.

Indeed, the degree to which trailing commissions continue to exist in the new financial planning environment will be a reflection of the extent to which consumers and clients remain disengaged.

So what financial planners need to ask themselves is how many of their clients, having been alerted to the new financial advice regime and no doubt battered by stories about what trailing commissions actually entail, will be content to leave such arrangements in place.

Indeed, it seems very likely that financial planners will not only face negativity concerning trails from the Government and the media, but from their own kind.

Financial planners, keen to expand their client bases, will almost certainly seek to persuade consumers to switch providers and, in so doing, switch off legacy trail arrangements.

Given the degree to which trailing commissions have been fundamental to the market value of financial planning practices, the industry will clearly need to come to terms with changes that far outreach those initially discussed by the Government.

Of course, planners can forestall such impacts by ensuring they engage their clients in a way that keeps them satisfied with pre-existing remuneration arrangements.