Advisers at risk over asset-based fees
Thursday, 10 January 2013 2:55pm

Advisers might need to change the way that they charge asset-based fees, which can create conflicts of interest, said finance consulting group The Fold.

While the Federal Government's Future of Financial Advice (FoFA) reforms have done a clean-sweep of the industry, asset-based fees can be just as bad as commissions when it comes to creating conflicts of interest, said The Fold managing director Claire Wivell-Plater.

Wivell-Plater said that the problem with asset-based fees is that they make it temping for advisers to recommend products that see them managing as many assets as possible, potentially when that is not in clients' best interest.

Under the Best Interests Duty, clients must be given non-product-related solutions where appropriate, even if that means the client is less likely to need future advice.

"The new Conflicts Priority Rule means that advisers cannot recommend strategies or products that create extra revenue for themselves or their licensees unless they can demonstrate additional benefit for the client," Wivell-Plater said.

While the government is not banning asset-based fees, Wivell-Plater likened the revised rules to new NSW anti-smoking regulation, that while not actually outlawing cigarettes, "Make it difficult to smoke anywhere."

Similarly, regulation outlined in the Australian Securities & Investment Commission's regulatory guide 175, does not stamp-out asset-based fees, but it does mean many advisers are at risk of falling foul of the Conflicts Priority Rule, Wivell Plater said.

While asset-based fees can potentially lead to a conflict of interest, so can time-based fee arrangements or flat fee-for-service models, and all these options can be managed if the adviser remains true to their fiduciary duty, Richard Batten, financial services partner at law firm Minter Ellison, told Financial Standard.

While Batten said that ASIC would come down hard on anyone misleading clients with asset-based fees, "it's very cut-and-dried" to say there is a push to stamp them out.

"I think that is a step beyond where the regulators are currently at. I don't see them having such a strong view on asset-based fees at this time," he said.

If a client tells their financial adviser that they want advice on a certain pool of assets, then in most cases there is no incentive for the adviser to do anything other than recommend products that will grow the assets they have been charged with, said Batten.

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