Trail commissions not for ongoing service says AFA


Grandfathered investment and superannuation product trail commissions are declining in influence and should be allowed to continue, according to the Association of Financial Advisers (AFA).
What is more the AFA has claimed that trail commissions do not actually constitute an ongoing service arrangement and should not be treated as such.
In its submission responding to the first-round financial advice hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the AFA also claimed the decision with respect to commissions was not always in the hands of advisers, with many clients opting to remain inside such arrangements.
“Grandfathered investment and superannuation product trail commissions are a declining influence in the financial advice sector,” the submission said. “Trail commissions are typically between 0.2 per cent and 0.4 per cent of the account balance, which is at a level well below the typical fee for ongoing service arrangements.”
“For this reason, the relationship with a commission-only client is often a different relationship to one with an ongoing fee arrangement client and the level of service is often different,” it said. “When offered the choice to change to a post-Future of Financial Advice (FoFA) product, many clients choose to stay where they are.”
The AFA submission also argued that a trail commission payment for a superannuation or investment product did not constitute an ongoing service contract between the financial adviser and the client.
“An ongoing fee arrangement is very different as it does require the provision of ongoing service and is an agreement between the adviser and the client,” the AFA said.
The organisation made a specific point of noting that, in the context of life insurance renewal commissions, the situation was somewhat different as the payment “might enable the adviser to do a regular review of the client’s insurance needs and also cover their costs when providing support and assistance in the claims management process”.
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