InFocus: Volume rebates are long gone so who gets the money now?

It is now approaching half a decade since the Future of Financial Advice (FoFA) changes saw “volume rebates” to financial advice firms and therefore to financial advisers banned as part of the broad lexicon of what is regarded as conflicted remuneration.

It was envisaged at the time that as well as removing the perceived conflicts of interest, the removal of the volume rebates paid by platforms and other product providers might actually lead to a lowering of the fees paid by financial advice clients.

But if that was the intention, then the outcome has fallen well short of the objective with financial advisers and, by definition their clients, perhaps paying less in platform fees but with fund managers paying more than they were five years’ ago and then passing the cost through to the client.

All of this has become the accepted norm in the financial services industry but the continued existence of platform fees paid by funds managers has given rise to questions being asked within key Parliamentary Committees about how the system is working and who have been the ultimate beneficiaries?

The level of interest on the part of Parliamentarians has risen because of the timings around the phasing out of grandfathered remuneration arrangements on 1 January, 2021, albeit that the status of shelf-space fees is understood to not be part of a remit handed to the Australian Securities and Investments Commission (ASIC) to look at those arrangements.

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What ASIC will find when it reviews the situation with respect to the grandfathered remuneration arrangements is that most of them have already been ended with a number of the larger players moving well ahead of the Government-imposed deadline. 

But in the eyes of at least some politicians, the status of shelf-space fees remains nebulous and this is probably because the original FoFA legislation was squarely aimed at financial advisers rather than the platforms or product providers.

As a result of FoFA, amendments were made to the Corporations Act which declared that a platform operator may not (subject to certain exclusions) accept a volume-based shelf-space fee from a funds manager and that an Australian Financial Services Licensee (AFSL), or its representative, who provides financial product advice to a retail client must not charge asset-based fees on borrowed amounts used to acquire financial products by, or on behalf of, the client.

In simple terms, financial advisers found themselves precluded from receiving any remuneration which could be interpreted as having been derived from the distribution of a product while, in turn, platform providers were prohibited from receiving volume-based shelf-space fees from fund managers.

This meant it was never going to be difficult for the platform providers to adjust their arrangements with fund managers, with the result that the fund managers are continuing to pay substantial fees for space on the platform shelf, just not on the same basis as before the FoFA legislation and the issue of guidance by ASIC in 2017 and 2018.

The bottom line as the industry prepares to enter 2021 is that fund managers can expect to pay six figure sums to have their products on the major platforms with none of that money going anywhere near the remuneration of a financial adviser.

The costs vary from platform to platform but can involve the fund manager paying $7,000 a year for the privilege of being on the platform plus $10,000 for each fund then listed on the platform, while other platforms charge flat fees of anywhere between $10,000 and $25,000 per fund.

It represents an expensive exercise, especially for boutiques, and few fund managers would deny they build those costs into the price of investment of their funds, so the consumer still ultimately pays.