FOFA – “Grandfathering” a joke

Trailing commissions were created in the 1990s as no more than “loyalty” payments by fund managers to advisers, to “bribe” them to remain loyal to the investment.

I love the term “grandfathering”. A nice soft and seemingly gentle term with connotations of kindness and benefaction, don’t you think? In reality, the term “grandfathering” is commonly used in financial services as an excuse to allow the “rollover” of past deficiencies when new regulation is brought to bear. It might refer to a lift in education standards, and sometimes is justifiable and relatively harmless. In the case of FoFA, it refers to the very essence of the regulation – product related commissions and conflicts of interest.

In FoFA terms, “grandfathering” concessions relate to the ability for advisers to continue to receive trail commissions on investments that existed prior to the introduction of FoFA. So, while FoFA purports to protect the consumer against hidden, unjust commissions and ban conflicts of interest, it does not apply those standards against the billions of dollars caught up in these arrangements over the past 30 years.

However, there is a more sinister outcome of FoFA grandfathering, and it relates to future advice being in the clients’ best interests.

The situation that applies to the existing “grandfathered” trail commission arrangement only applies as long as the client retains that particular investment. So the adviser receiving the trail commission is highly unlikely to recommend any of these investments be sold, even if it were in the client’s best interests to do so. Bear in mind that many advisers receiving trail commission haven’t spoken to the clients involved for years!

Minister Sinodinos should look very closely at the grandfathering terms of FoFA. If he is serious in his endeavours to achieve fairness for the investing public and achieve a truly professional financial advice profession, he should ban commissions retrospectively.