I watched the spectacle of the Royal Commission into the Misconduct into the Banking, Superannuation and Financial Services Industry (RC) via live streaming. It felt like I was watching an episode of Game of Thrones with shocking revelations and blood everywhere. It is only post the shock that we have had the time to digest and think about the ramifications of what we have just witnessed.
I had originally thought the RC was unnecessary given the continual reviews being conducted and especially post the introduction of the Future of Financial Advice (FOFA) and the Banking Executive Accountability Reform (BEAR introduced 07.02.2018). I believed that is was just the government having to bend to the political winds.
I was wrong. The revelations were staggering and we will continue to see the ripples become Tsunami’s of change in the coming weeks, months and years.
The first wave has crashed on AMP. AMP’s Board has largely gone, share price has slumped from $6.50 in January 2015 to $3.73 (as at 14th May 2017) a fall of 42.62%.
Rowena Orr QC in the RC made recommendations that AMP should face criminal charges for misleading the regulator.
The community is angry for the multiple breaches of trust evidenced and many Superannuation funds are asking themselves the question as to whether AMP reflects their groups ethos and members’ best interests. The reality is many of the long-term superfunds have very beneficial legacy insurance terms that cannot be matched by any successor funds. However, retail makes up much of AMP Funds Under Management (FUM) and this can move as advisers and individuals make their decisions.
Australian Ethical announced their divestment of AMP on the 10th of May, 2018.
This anger is also reflected by the two class actions claiming up to $2 Billion that have been filed against them which AMP have stated they will strenuously defend.
At the AMP shareholders meeting on the 10th of May, AMP suffered the largest ”first strike” by shareholders ever recorded against an Australian Top 50 company with 61.5% of investors voting against the company’s executive pay structure at a fiery annual meeting.
We have received multiple calls from AMP advisers angry that their reputations have been stained and also afraid that Buyer of Last Resort (BOLR) will be removed as it may be deemed to be conflicted and not in clients’ best interests. It is estimated that 1400 practices have BOLR arrangements. Some are reassessing their agreements and recognize there is a “good character” clause in their agreements and that if there is a breach they can be instantly removed and advisers are seeking assessment if the same or similar responsibilities and obligations also apply to AMP.
AMP is the hardest house to leave given their position is that they own the client and the adviser only has the right to the revenue of the client. It is understood this relationship has been challenged in the past and whilst confidentiality agreements have been entered into on practices that have left, precedence has been achieved.
AMP is very exposed as they are dependent on their internal distribution channel more than most product providers.
The Money Management Top 100 Financial Planning Group Survey released in September 2017 reported that AMP Financial Planning had lost 120 advisers, and from Charter Financial Planning a further 91 planners, and a full 250 advisers left over their 4 Dealer Groups in a 12-month period. Representing more than 10% of its total planner numbers.
Alice Uribe of the AFR reported in February that 570 advisers had left in the last 12 months.
Bell Potter analyst Latifane Sotiriou estimated AMP was losing 50 to 150 advisers every six months to retirement or competitors.
Whichever figure is correct, the trend is clear.
The Money Management survey published in September 2017 found that the Big 5 and AMP had seen a departure of more than 600 advisers.
We saw last week NAB advise they will divest its MLC business as part of a plan to ”reshape” its wealth management business (advice, platform, superannuation and asset management).
“Separation is targeted by the end of the 2019 calendar year, subject to market conditions and required approvals”.
The demerging of their advice business will be similar to their divestment of Clydesdale Bank (UK) and Great Western (USA).
In the event of an Initial Public Offer (IPO) NAB would remain as foundation shareholders, but they will also consider trade sale if the opportunity is right.
On the question from Forte to MLC as to whether advisers will be granted IPO stock, this is unknown, but it would not be related to volume or FUM as it would be deemed conflicted. The position is unknown also regarding any retention payments. ASIC is rightly very focused on any “soft dollar” arrangements.
Godfrey Pembroke, one of six large licensee dealer groups owned by NAB, has decided to separate from the bank and become an independent licensee.
At March 1, 2018, Godfrey Pembroke comprised 138 of the 1511 advisers within the NAB licensing network. National Australia Bank and GWM Adviser Services are the two largest NAB-owned licensees, with 486 and 470 advisers, respectively.
ANZ had already entered into an agreement with IOOF before the RC. IOOF’s share price has fallen from the October 2017 high of $11.84 to $9.42 (09.05.2017) a fall of 20.44%.
APRA on the 1st of May handed down a report into governance, accountability and culture at the CBA. APRA found “there was a complacent culture, dismissive of regulators, an ineffective board that lacked zeal and failed to provide oversight, a lack of accountability and ownership of key risks by senior executives, a remuneration framework that had no bite and they were reactive, slow and had under-resourced systems and processes internally”.
On the 9th of May, CBA joined NAB and ANZ by reaching an agreement with ASIC to settle civil proceedings alleging manipulation of the bank bill swap rate. CBA has agreed to pay $5m penalty, a payment of $15m to a financial consumer protection fund and $5m towards ASIC’s cost of litigation. CBA will enter an enforceable undertaking. It is expected that NAB and ANZ will have similar settlements. The CBA offered APRA a enforceable undertaking in response to the report. APRA will add $1 billion to the CBA’s minimum capital requirement until the changes required by the undertaking are completed to the regulator’s satisfaction.
Westpac has publicly committed to BT this week. As for Westpac’s intent on their advice groups, it is unknown at the moment.
The problem for the banks in seeking a buyer or an IPO is that their Dealer Groups have not been run for-profit, but for distribution with cost recovery in their vertical integration.
In the Federal Budget, ASIC’s budget will be cut by $26m to $320m and lose 30 staff. Under 2016 funding reforms, ASIC is now entirely funded by the banks, super funds, insurance companies and publicly listed companies through the user pays system that will add more than $1B to the budget by 2021.
The concern we have for the future is multi- faceted and is around the final summation of Rowena Orr as reported by the Australian Financial Review –
- counsel assisting Rowena Orr, QC, called for submissions on whether the separation of product and advice should be enforced, a move that, if adopted, would trigger a break-up of AMP, the major banks and Macquarie.
Rowena Orr QC has “raised … other changes that would cut billions from bank revenues: (1) ending commissions that were grandfathered or exempted from the 2013 reforms, and (2) ending ongoing service fees, which have replaced commissions and are just as problematic”. (3) She also asked for industry submissions on whether “clients receive any meaningful benefit from ongoing service arrangements”.
Commissioner Kenneth Hayne indicated he would be paying attention to the industry’s analysis of the structure question. “There are product manufacture, product sale, advice, and the way in which those three elements either fit together or don’t fit together according to both existing firm structures and according to some view of what is appropriate,” he said.
BT are the first to move as voiced in the Royal Commission in the final week –
From 1 October 2018, Mr Wright said, BT will be ending grandfathered commissions for superannuation and investments – although risk commissions will remain (as per the Life Insurance Framework).
I suspect some will follow BT’s example and others may have no choice with new legislation being potentially enforced on the industry in regards to vertical integration and grandfathered revenue and volume-based incentives. The other banks and AMP/IOOF don’t have alternative new age platforms. BT’s move may also be aligned with a wider strategy to push as much FUM to Panorama, so it is potentially convenient and fits a wider business strategy whilst appearing to be good corporate citizens (not saying they are not).
If wide scale adoption does occur, it will have a substantial impact as I expect up to 70/80% of businesses have some form of reliance on this income. For some mature businesses overrides can be $100,000’s. The extinction of this revenue will not only impact the businesses P&L’s but also Balance Sheets. For many, it could be financially devastating. The overrides certainly cover many fixed costs such as personnel so we may see job losses and a further catalyst for movement within and for some out of the industry.
The cessation of grandfathered revenue will not likely assist the consumer but will be retained by the product manufacturer.
The 2013 grandfathering contribution to total revenue may be diminishing with ongoing advice, but it is still a very important contributor to financial viability of many practices.
The FPA has told the RC that grandfathered commissions should be phased out over a three-year period.
At a minimum there will be substantial loss of productivity/revenue in the future as businesses have to re-engineer their grand fathered FUM to clearly illustrate unconflicted clients best interest being served.
In July 2016 research for the Financial Services Council, wealth and asset management consulting firm Tria calculated that the eight major regulatory reform initiatives – Future of Financial Advice, MySuper, APRA reporting, SuperStream, the Life Insurance Framework, Adviser Standards, FATCA/GATCA (foreign/global account tax compliance crackdowns) and Stronger Super changes – incurred costs of $2.75 billion in recent years.
If the removal of grandfathering is enforced or the example of BT copied we will see more breakaways to Independents or own licencing as the financial incentive to stay is removed.
However, the growth of “Independence” is assured and will be at a faster rate than ever before. Whether this will be in the form of individual licencing or current Dealer structure is yet to be determined.
We will see substantial growth of new gen platforms – Hub 24, Netwealth etc. UBS analysis found so- called speciality providers were continuing to capture a significant share of retail flow compared with the banks, AMP, IOOF and Macquarie, accounting for 46% of quarterly net flows despite administering only 3.5% of FUM. Speciality platform providers saw net inflows of $2b and overtook the major institutions which gained 1.9 B in the September 2017 quarter, lifting their 12- month share to 36%. With the break-up of the bank or the forced movement of grandfathered FUM this will only increase.
This is a good thing as consumers are moved to lower cost platforms with enhanced visibility and services.
Sam Henderson’s testimony and apparent bias for inhouse product may also impact IMA’s/SMA’s and MDA’s vertical integration solutions if there is found to be clear financial incentive and no comparative analysis provided. I expect there will be the need to illustrate “best of breed” with comparison to other similar platforms/asset management being necessary but this will not slow the growth of this sector. Many providers already provide comparisons of other similar users fund performance e.g Managed Accounts.
It is likely we will see greater disclosure requirements as to level of fee participation for the adviser and Dealer receive and a dollar value attributed to not only advise but inclusive of investment management fee. Many IMA/MDA operators have been relying on relief of class orders. Whereby fees receivable maybe in FSG but not in total dollar form in SOA asic.gov.au/media/4028003/rg179-published-29-september-2016.pdf
Items 2 and 3 in the above summation is the most troubling – ending ongoing advice fees. Whilst the RC achieved a lot in a small timeframe their recommendations will be based on a small sample of poor advise. The “independent” component of the industry should not be congratulating itself on the break- up of the Bank oligopoly because it is likely when the RC pass their recommendations to parliament we will all likely be in the same boat.
Choice submission to the RC made the following comments in regards to asset based fees – “bear no relationship to the actual work done by the financial adviser or the quality of the work conducted”. “Asset based fees create conflicts of interest that may encourage the adviser to give poor quality advice. They discourage strategic advice, such as personal debt reduction, like paying down a home loan or credit card, for which the adviser would not earn a fee…”
I would ask the reader to imagine themselves sitting in the RC witness chair and how would they respond to this hypothetical question – Why does one client with $100,000 paying 1% or $1,000 get the same service of a $1,000,000 client paying 1% or $10,000?
The answer for many is providing segmented and fixed costs with a clear value proposition.
The government will have little choice but to accept all of the findings even though the focus was only on the headline grabbing negatives, no benefit of defence council and limited time for individual or industry response.
In the RC final considerations and recommendations, it needs to be remembered The Financial Services industry represents 9.3% of GDP. The largest contributor of growth of any sector. It employees 450,000 people and indirectly substantially more with indirect services like legal, accounting, technology, administration etc.
The vast majority of the advice industry is dedicating their lives to ensuring as many Australians as possible are financially independent in retirement.
We have one of the best superannuation systems already in the world providing attractive returns, innovative products in one of the world’s lowest fee regimes dictated by intense local and international competition.
The life insurance industry paid out $7 to $8 billion in claims assisting Australians in their time of greatest need.
Financial Services are leading contributors to corporate Philanthropy putting almost $700m into the community via charities and foundations.
The core of our industry is not rotten as it has been presented for the majority of us it is something we are and should be proud of as we the industry and individually make positive impacts to Australians lives.
The associations must come together as a united voice, we will require lobbying and representation to try and ensure some balance is achieved. If there needs to be a fund created for advocacy this should be done as quickly as possible. It is unfortunate that the independent community does not have the financial resources of the Banks and we in most part we are islands to each other but we need to come together like never before.
It is interesting to look at other countries that have gone through similar legislative change such as the UK https://www.fca.org.uk/firms/professional-standards-advisers and Holland as evidenced by the Dutch ban on commissions in 2013 which, according to one article, shows transformation was over 10 years. It is likely that FOFA will prove to have been only an intermediate step in the progression of our industry.
This is not a time for panic as I am sure the Commissioner, The Honourable Kenneth Hayne AC QC will look for pragmatic solutions and will have an eye to international best practice. An extension has been asked for and the earliest we are likely to see the recommendations is Oct/November 2018 or more likely in February 2019.Though both the government and Labour remain open to extending the royal commission beyond the year it has been scheduled for if that is requested by commissioner Kenneth Hayne.
We now wait for the next exciting episode as the RC moves to Superannuation, especially with the evidence to be provided by the Industry Funds. It is expected questions will be on the disclosure of fees and those with internal adviser’s illustration of client’s best interest. As an observation the industry funds have gone very quiet – no crowing from the sidelines or even the proliferation of ads vs advisers with “compare the pair” and vs bank “fox in the hen house”. It was reported that they spent $37m in 2017 on advertising and with the greatest opportunity to drive their marketing agenda we hear silence. Very strange or do they know what is around the corner given the questions provided to them from the RC which they must address?
The Royal Commission we can safely say will be transformative and those that can pivot with change will succeed those that can’t will fail – Institutions and small businesses alike.
“It is not the strongest or the most intelligent who will survive but those who can best manage change”
– Charles Darwin
Forte’s Experience in the last 2 weeks to 10/05/2018
In the last two weeks at Forte we have seen had substantial increase in the number of enquiries from planning practices and breakaway groups seeking Forte Dealer Solutions assistance to find a new Dealer/Licensee or to achieve self-licensing.
Over the last 12 months we have seen a clear preference to move to smaller Dealer Groups with less than 50 advisers that have a strong collegiate culture and where a single voice can be heard. In addition to helping these individual practices move, Stephen Southwood has assisted a number of practices to come together to form break away groups. The common theme in all cases is a desire to control the future of their businesses albeit with a fear factor regarding the obligations of compliance and the perceived costs of a non-subsidised environment.
When considering Self-Licensing, the average timeline is now 6 to 9 months for an ASIC licence from submission of an application to approval. The cost of a “consultant assisted” application is on average $10k to $15k depending on the complexity of the business. PI Insurance and ongoing compliance are two of the larger ongoing costs at approximately 2% of gross revenue and between $10k and $60,000k (for an external consultant) respectively. Technology can also account for a considerable share of ongoing expenses depending again on the needs of the business. Many of the other services a business would typically need can generally be outsourced or conducted in-house. Forte has sourced best-of-breed external providers and have a working knowledge of those Dealers/Licensees also providing Dealer-to-Dealer/Boutique services.
For those businesses seeking to migrate to an alternate Dealer/Licensee, Forte has and continues to conduct due diligence on most Dealer groups offerings (ASIC actions, financial stability, culture identification, service offers, cost, etc, etc) to identify the most appropriate and best aligned Dealer/Licensee in each circumstance.
Shortly, we will be changing the name of this service line to “Forte Licensing Solutions” to clearly speak to what we do and stop any confusion as to us being a Dealer/Licensee – we are not. We look to the total market to find the right home and most appropriate licensing solution for the individual practice.
Forte Asset Solutions has received in the last 2 weeks the equivalent of the previous 3 months of enquires in regards to sale of practices and exit of industry. The current excessive demand to supply is slowly shifting as many bring forward their exit dates, which for many was the period up to and including 2024 with the mandatory education requirements. The last 2 weeks points to future legislative change and business re-engineering and for many they are taking a personal inventory and realising they do not have the energy for the change that is about to come.
Supply is growing but it is still not even to close to meeting demand and there have been no changes in prices or terms being achieved. I do expect contractual changes to the way grandfathered revenue is treated.
Forte is about to launch its next service line Forte Consulting Solutions in the next few weeks bringing together industry experts and business owners to assist advice businesses to grow and protect what they have built.
An amazing couple of weeks that will change our industry forever. To date there has been little legislative change to the benefit of the consumer it is my hope that future change will start and finish with the public interest front and centre.
“There is nothing wrong with change, if it is in the right direction”
– Winston Churchill