Tue 12 November 2019

Real McCoy Worth Dough

It would be foolhardy to try to

justify the retention of a

regime that resulted in owners

of financial products being

charged fees for services that

were not, ultimately, provided.

That said, introducing a law

that outlaws contractual terms

that were allowable at the time

the contract was entered into

would be seen by any reasonable

person as grossly unfair.

The recent move by the Federal

Government to turn off previously

grandfathered payments

to advisers from financial products

bears the hallmarks of

American laws that started

almost a century ago to prohibit

alcohol. The rationale was simple;

if some people are abusing a

right, remove that right.

The reason Prohibition was

short-lived is pretty simple, too.

It didn’t take long for the

government to work out that it

was unfair to impose restrictions

on the entire community

simply because a few people

were incapable of enjoying the

privilege responsibly.

You might be of the view that

this most recent case of “Ready,

fire, aim!” by the Federal

Government has little impact

other than stopping advisers

being paid for doing nothing.

However, the unintended negative

consequences of this change

are many and varied.

Some of the products paying

these “commissions” have no

mechanism under which the

commission can be refunded

into the product.

But it is questionable whether

the new law will require that the

product provider issues cheques

to the customers in question.

Many financial advisers

acquired “books” of clients on

valuations that included this

“grandfathered” remuneration.

In many instances, the valuation

secured the borrowing that

funded the purchase, while the

cashflow they generated helped

service the debt.

Is it fair these advisers should

lose the asset and the revenue

stream, but be left with the debt?

Many of the products which

are subject to these arrangements

are also the beneficiaries

of “grandfathered” treatment

by Centrelink & Department of

Veterans’ Affairs. This usually

precludes their replacement by

an alternative product that is not

paying the now banned grandfathered

remuneration.

An adviser may be unable to

put the client on a fee-for-service

arrangement without triggering

adverse impact on the client’s

social security entitlements.

Rightly or wrongly, many of

the owners of these financial

products would perceive they

could not afford financial advice

unless the adviser was being

remunerated via the product.

Adviser numbers are dwindling

after the royal commission and

the impending impact of the new

Financial Adviser Standards

and Ethics Authority requirements.

It is questionable whether the

Government is prepared to compound

this problem with this latest

measure and the departure

of even more advisers. The cost

of financial advice is moving beyond

the reach of those who

most need it. These latest changes

exacerbate that problem.

The royal commission uncovered

unsavoury practices that,

rightly, needed to be brought to a

halt. However, discontinuing a

perfectly legitimate contractual

arrangement simply because a

tiny minority took advantage is

akin to cracking the proverbial

nut with a sledgehammer.

It is disturbing to think about

the drunkard spending the

family grocery money on booze,

but I do like to be able to enjoy

a glass of wine with friends

without breaking the law.

The responsible majority

should not be penalised because

of the actions of a minority, be it

in their beverage choice or way

of paying a financial adviser.

Real McCoy worth dough

Wayne Leggett

Wayne Leggett is a director of

Paramount Financial Solutions