Alienation threatens industry relationships

The relationship between financial planners and dealers is under fire.

The effects of the upcoming Financial Services Reform Bill (FSRB) combined with that of the Alienation of Personal Services Income (APSI) could radically change the dynamic between advisers and dealers.

These changes will affect every planner and dealer group in operation, with the potential to push dealer groups to the periphery.

Investor Security Group managing director Robert Keavney says the changes could reduce dealers to no more than simple back office service suppliers.

While his claim may sound far-fetched, the two pieces of regulation have combined to produce a possible minefield for the industry.

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The APSI regulation currently has planners struggling to deal with differing definitions of what is personal services income as defined by the Australian Tax Office (ATO).

Financial Planning Association (FPA) policy manager Con Hristodoulidis says planners are being forced to seek determinations through one of a range of criteria, to side step having the income of their practice taxed incorrectly.

"Since the ATO automatically considers them to fail the 80 per cent rule, they are going through the process of getting determinations to avoid paying tax at their own marginal tax rate," Hristodoulidis says.

This is widely regarded as an unintended consequence of the whole process and the FPA and the Association of Financial Advisers (AFA) have been working hard to have this corrected.

Hristodoulidis also says both groups are still in discussion with the ATO over what will be considered as personal services income. However existing income from previous business, such as trails, have been excluded from the definitions already.

"The impact of this is a possible shift from fee for service to up front rebates and trails or advisers may just pursue their current trail business with existing clients," Hristodoulidis says.

"This idea will also apply to life and risk products so that part of the industry could do the same and under the FSRB all advisers can gain new licences which will allow them to do that."

At the same time changes within the FSRB will allow proper authorities to be held by corporate structures, which is a fundamental change, and planners may do so to avoid some of the provisions of APSI.

"One way round the whole issue of alienation is that advisers can gain their own license and move the dealer relationship directly to the fund managers," Hristodoulidis says.

However he says this would dramatically change the current licence and proper authority system.

"The current Corporations Law is self regulating with the Australian Security and Investment Commission (ASIC) issuing a licence to a dealer who in turn issues proper authorities," he says.

"Despite it being accepted industry practice there is nothing in the law that says a licensee pays a proper authority holder. As such a fund manager could work directly with a planner but it would become difficult to ensure investments were compliant, which occurs under the current system."

Keavney says he can understand why planners would look at that idea citing his own group as an example. He says a planner has five staff, all employed at arms length. At the same time the ATO taxes the planner for personal services income as if they were an employee of the dealer.

"Given this model, which is standard throughout the industry how can they say this is not a business with business income and expenditure, and who then are those five employees in the scheme of things," Keavney says.

Faced with problems such as that above and an opportunity to side step APSI, many planners will balance the costs against complying with ATO determinations and make the move to get their own licence. The implications of such a watershed change in relationships is immense.

"The whole contractual relationship would have to be re-examined between existing dealers and proper authorities. It would redefine sources of income and whether it was personal services related, as well as what products could be offered and what costs could be levered back to the dealer group," Hristodoulidis says.

Alternately a dealer group can approach their planners and make them employees. However this flies in the face of small business style planning organisations operating independently, a key issue for many of those giving advice.

Even if planners were willing to adopt this model, which in a sense harks back to the early days of the industry, would it be practical for the larger dealer groups, especially those tied to fund managers, many which have hundreds of planners on their books.

For these larger groups it means having to work with each planner and create a complete range of new relationships based on whether that planner will choose to be an employee or seek their own dealer's licence.

"Planners will still act the same way and deal with the same products but the issue lies in the licensing arrangement and importantly who will own the client will also need to be defined," Hristodoulidis says.

Keavney says any of these changes will have a material impact on the industry and for very little return or overall change in effectiveness of the industry.

"This will provide no increase in returns to clients or security for their investments and the commercial basis of the industry will continue but planners will take on more expenses as each change will add audit and compliance costs," Keavney says.

"Every planner will also have to look at issues such as professional indemnity insurance, which will have to be renegotiated individually, which will inevitably lift costs for clients."

One of the sadder consequences of these wide spread changes is that it may force a number of current advisers and planners out of the industry as they struggle to comply or decide that the effort is no longer worth the trouble.

"Some planners are looking at stepping out of the industry and this is larger concern for those working in life and risk insurance. They will have to comply with two sets of changes, a new licensing system as well as a new tax system," Hristodoulidis says.

And it is an attitude that has been voiced on a number of occasions, the most pointed being at a recent AFA roadshow in Sydney. An adviser stood up and stated that the only real determination these issues have forced him to consider had been one to retire.