Archive for month: May, 2011

Over the past 2 weeks, as a consequence of the recent FOFA announcements, a number of Radar Results clients have said they will not now pay the same level of recurring revenue, or EBIT multiple, that they were prepared to pay before the FOFA announcements. Depending on the style of the planning business, the products used, the client ages and, in particular, their current fee arrangements; Radar Results has seen a decrease in many financial planning firms’ valuations. Radar Results valuers have reduced EBIT multiples by 0.5X since the recent FOFA announcement, equal to a reduction of approximately 10% of a practice’s value.

In the late 1990s I recall being asked to visit a retiree in Charlestown, Newcastle, who had invested $450,000 with a local planner 3 years earlier and, since investing, hadn’t seen the planner again, although he was working in the CBD some 12 minutes away. The retiree was after some service and wasn’t happy; he had been receiving a quarterly statement directly from the licensee for the funds under management (FUM) that he held. The FUM was held entirely in one Master Trust, and the licensee was being paid an annual service-fee payment of 0.8% or $3,600; so over 3 years the retiree had paid $10,800 to his licensee and planner, and had received basically no service. That’s what FOFA wants to alter; as The Hon Bill Shorten, MP, said in his press release on 28 April 2011, “The policy reflects the need to ensure that advisers do not charge ongoing fees where the client is receiving little or no service.”

Shorten went on to say that “volume rebates from platform providers to dealer groups must cease”. Herding clients into a particular administration vehicle for the financial benefit of the adviser and licensee may not be considered credible. Irrespective of whether there were other reasons for substantially using one particular platform, FOFA will eliminate any temptation for revenue to be paid based on volume.

A concern I have with FOFA is the proposal for a 2 year Opt-in. An annual renewal notice must still be sent to all clients specifying what work was performed by the adviser in the previous year, and what was received by them in fees over that period; as well as providing the same details for the coming year. The only difference from the first reform paper, on 26 April 2010, to this latest announcement (28 April 2011) is the requirement for the client to sign, i.e. Opt-in, every second year. If the client is unresponsive or, in other words, if you can’t find them to sign, you must stop taking the commission, trail or service fee.

 But of far greater concern is the Government’s inability to outline a definite grandfathering arrangement. Grandfathering has been presumed by most advisers to be automatic, however, Shorten’s recent statement that “issues around grandfathering arrangements will still be subject of further consultation” is certainly not what planners wanted to hear. The question is whether life insurance agents, who have been building up client registers for many years, may have a part of their register rendered worthless. Certainly, retail risk policies written inside a personal super plan seem to be in the firing line.

Also, the Government’s FOFA proposals have watered down the adviser’s fiduciary duty to a ‘statutory best interest duty’; stating that they, the individual adviser, will not be held financially liable for any breach of their duty.

Last, but not least, is the Government’s tougher stand on gearing. The 26 April 2010 paper banned any adviser fees being charged against the component of an investment that’s geared, but last week Shorten said “an asset-based fee cannot be charged, even on the ungeared component.” This is certainly an attempt to discourage gearing; and any financial planning practice that has a large component of clients geared may need to take swift action to protect their revenue, and the value of their business.