Court decision casts doubt on Adviser Service Fees

Recent action in the NSW Supreme Court over the status of Adviser Service Fees when authorised representatives change licensees appears to have raised more questions than it has answered. Mike Taylor reports.

Who owns the client?

Does the client understand who they are really paying and how?

Those are two of the key questions to emerge from a NSW Supreme Court decision handed down in mid-December involving a dispute between the principal of Berry Financial Services and chair of the Financial Planning Association (FPA), Julie Berry, and IOOF-controlled Questor Financial Services Limited, Executive Wealth Management Financial Services and Bridges Financial Services (EWM/Bridges).

Distilled to its essence, the case went to the heart of a financial planner’s relationship with his or her clients, and the remuneration structures that flow between platforms, dealer groups and then planners as authorised representatives.

Berry, who resigned as an authorised representative of EWM/Bridges to become an authorised representative of competitor ComCorp, believed she was still entitled to her share of the Adviser Service Fee (ASF) via EWM/Bridges relating to continued investments in Questor’s The Portfolio Services (TPS) platform because that is what her clients said they wanted.

What is more, her lawyers argued that such arrangements with respect to the ASFs being paid to planners who were no longer authorised representatives were not unprecedented and cited examples of where this had occurred.

Berry argued that she had resigned as an authorised representative of EWM/Bridges over service issues, not out of any dissatisfaction with the performance of the TPS platform.

Berry found herself on the losing end of the decision handed down by Justice Bergin because the judge held that the ASF was payable to EWM/Bridges in trust for the planner, but only if the planner was, indeed, an EWM/Bridges authorised representative.

While the NSW Supreme Court decision has very likely served the letter of the law and correctly interpreted the contractual relationship that exists between authorised representatives and their licensees/dealer groups, it could equally be seen as having failed to recognise the nature of the relationship that exists between clients and their planners.

Notwithstanding the fact that a number of documents furnished to Berry’s clients made clear that the ASF would be paid, consistent with their wishes, by the platform to the licensee and thence 88 per cent to Berry, it seems fair to assume most clients would have regarded this as simply a remuneration mechanism via which to pay their adviser.

It was never disputed in the court proceedings that Berry owned the relationship with her clients. What was disputed was whether the existence of that relationship and the wishes of her clients outweighed the terms of her contract as an authorised representative.

Berry’s loss in the Supreme Court gained a fair amount of media attention in the opening weeks of 2010 and it is fair to say that much of that attention was owed to her position as chairperson of the FPA.

Similar action by a lesser-known planner was unlikely to have generated the same levels of publicity.

However, the court proceedings, which began in September and were heard by Justice Bergin through October, served to pull back the curtain that normally obscures the workings of the financial planning industry, the relationships that exist and how planners are ultimately remunerated.

The Parliamentary Joint Committee on Corporations and Financial Services (Ripoll Inquiry) spent many months digesting submissions and taking evidence about the practices and structures of the financial planning industry last year when a few days spent in the NSW Supreme Court might have proved equally illuminating.

Indeed, Justice Bergin’s ultimate decision might have served to harden the committee’s views with respect to the types of relationships that exist between product providers and dealer groups and then dealer groups and their authorised representatives.

What the circumstances of the court case and Justice Bergin’s decision make clear is that the existing commission-based remuneration structures have created anomalies within the financial planning industry which have the potential to not only undermine the best interests of clients but also those of their financial planners.

According to her evidence to the court, Berry was satisfied with the investment performance of Questor’s platform but might have been disposed towards advising her clients to exit the product if she had known that, by resigning as an authorised representative of EWM/Bridges, she would be precluded from receiving an ASF from that investment.

It would seem to follow, therefore, that the nature of the contractual arrangements served neither her interests nor those of her clients.

Without having yet pursued an appeal, Berry has found herself precluded from receiving an ASF on investments made into TPS and, at the same time, has been ordered to pay the court costs incurred by Questor and EWM/Bridges relating to her legal action.

Speaking to Money Management last week, Berry said that so far as she was concerned the ASF represented the clients' money and that the clients had indicated they wanted her to be paid.

"I am intent on putting the client first in all of this, and I am at a loss to understand the decision," she said.

There will be those who believe Berry’s experience underscores the need to phase out commissions-based remuneration and embrace fee for service.