Bumpy journey for the soft dollar

“This issue is a huge sleeper and it makes John Laws look like a bloody Franciscan monk.”

“This issue is a huge sleeper and it makes John Laws look like a bloody Franciscan monk.”

So said one of the financial planners who recently spoke to Money Management on the topic of soft dollar commissions in the financial planning industry.

Certainly, there are numerous stories floating around about fund managers dishing out marketing dollars to reward planners selling large volumes of their products.

One prominent funds management group handed out tickets to the 1992 Barcelona Olympic Games to planners who wrote the most business up to the event. And an-other fund manager is apparently following the same tack, this time offering tickets to next year’s Sydney Olympic Games. Then there are the trips to places as far and wide as Vienna and Paris which planners can attend gratis, provided they meet the thresh-old of business written for a particular funds management group.

It is also common practice for fund managers to pay to be present at dealer group con-ferences. One dealer group has even made a significant profit from their last dealer conference, according to industry gossip.

In the last edition of Money Management, planners in the Adviser Feedback col-umn were asked how deeply entrenched they felt soft dollar commissions were in the industry. The responses were split down the middle. Yes, soft dollar exists. No, it doesn’t. Even more telling, the planners quoted disagreed on the issue of whether soft dollar was a legitimate business writeoff.

Altcorp Financial’s director Ken Bloomfield thought soft dollar was on the wane “and I believe rightly so”, he said.

On the other hand Grant Taylor, a principal with Taylor Financial Group in Victo-ria, said soft dollar formed “a relevant part of an advisers’ total practice” and was completely “valid”.

Certainly the issue of soft dollar is a contentious one. Contentious enough to war-rant most of the industry players Money Management contacted for this article to shy away from being named on the record. Most of these agree, however, that soft dollar commissions are a deeply entrenched practice within the planning industry and that the payment of soft dollar continues unabated, even in a pre-CLERP 6 en-vironment.

Yet soft dollar is only really an issue if it is not disclosed, according to the Austra-lian Consumers’ Association’s policy officer Dan Coyne.

“Just because you’re getting soft dollar commissions doesn’t mean you’re com-promised. A good adviser may receive soft dollar and disclose it and they and their client will feel comfortable with it,” he says.

Many financial planners include disclosure of soft dollar commissions as part of the literature they supply to their clients in regular correspondence. However, planners argue that there is great difficulty in disclosing all non-financial benefits received from fund managers, particularly the smaller benefits.

“When I had my own planning practice, I was faced with a dilemma. Where do you draw the line? I mean, how can you be a little bit pregnant?” one fund manager told Money Management.

Aside from fully paid business trips, is a financial planner required to disclose benefits such as office stationery, IT and business development support and train-ing support? And if this is to be the case, what method can a planner use to disclose this to his or her clients?

Dan Coyne agrees there is a hazy line in disclosing soft dollar.

“I think that’s the problem with soft dollar — do you disclose it before or after you get it? I always suggest jokingly that a planner should send their clients a postcard when on a trip,” he says.

One adviser suggested that soft dollar was not an issue if the client was benefiting from it indirectly: “It is less obnoxious if it’s a genuine study trip you’re taking,” the planner said.

However, this view was not shared across the board, with one planner calling the receipt of any undisclosed soft dollar benefit as “disgusting”.

“It’s damn difficult for honest guys to compete,” he said.

In the Australian Securities and Investment Commission’s (ASIC) recently re-leased policy statement 122 on conduct in the investment advisory industry, the watchdog states that “a securities adviser (or an associate) may receive non-cash economic benefits as an incentive to promote the sale of securities of a particular fund or issuer….All these benefits and advantages must be disclosed…unless they are insignificant. An example of a benefit which can generally be regarded as in-significant is a one-off business lunch or a free seminar given to advisers by a product issuer.” (PS 122.64)

However, many in the industry state that, apart from disclosure, another pressing issue for planners receiving soft dollar is the potential for product bias. “At what level do you say that it effects the adviser? Obviously it does, or fund managers wouldn’t offer it. While they grudgingly pay soft dollar, they still do it,” one ad-viser said.

Others agreed the receipt of soft dollar creates bias.

“It is natural for a planner to feel warm and fuzzy towards a fund manager because they paid for their trip to Fiji.”

The Financial Planning Association (FPA) feels so strongly about soft dollar and commissions, it is about to release a guideline relating to the issue (only the third time it has done so). Draft Practice Guideline Number 3: Adviser Fees, Commis-sions, Benefits and Total Money Management/Administration Fees and Charges Incurred by Clients, will be presented to the FPA board on 28 September. Soon after this, it is hoped it will become available to FPA members to discuss.

Until this time, the FPA will continue to rely upon Rule 106 of its Rules of Profes-sional Conduct to outline its policy on soft dollar. The FPA requires its members to provide “complete transparency” in disclosing non-financial benefits from any product suppliers. FPA policy calls on its members to make their own moral judgement on what they do or do not accept in soft dollar commissions:

“The test should be ‘if you would be embarrassed to disclose a non financial bene-fit to a client then you should not accept it’.”

While many in the industry argue that soft dollar commissions are acceptable in other industries and so an acceptable practice in the financial planning industry, the Australian Consumers’ Association (ACA) disagrees.

“I’ve been confronted by this before. Planners will come up to me and tell me that soft dollar exists in the medical industry, for example, with doctors receiving bene-fits from pharmaceutical companies. But there is so much trust and faith people have in choosing to invest their life savings with a planner. A client is putting all their trust in this planner,” Coyne says.

Often it is the client who ultimately bears the cost of soft dollar commissions.

“Mr and Mrs Average pays for it. The only new dollars that come into the industry come through them. Once again, it is all about disclosure. It’s critical consumers know what they are paying for,” said one fund manager.

Another financial planner agreed that soft dollar was pushing up costs which were passed onto the client.

“MERs are higher as a result of all this. My clients are paying for someone’s bloody trip.”

However, it is not just clients who are on the receiving end of higher costs as a di-rect result of soft dollar. Many financial planners feel that smaller dealer groups are also financially disadvantaged by not having as much clout as the larger groups when dealing with fund managers. And much of the time proper authority holders do not get to see the full benefits of soft dollar commissions, with payments going through the dealers.

“Maybe it’s just sour grapes for the smaller dealers, because they can’t get the benefits, but it’s certainly true that the smaller groups don’t have the buying power of the larger ones,” said one planner.

Another planner contacted for Adviser Feedback in the last edition of Money Man-agement pointed to discrepancies between soft dollar benefits in urban practices compared with