Claire Wivell Plater, Managing Director of The Fold, says the problem with asset based fees is that they incentivise advisers to recommend strategies and products that maximise the assets they manage for the client.

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,” she said.

“If they are not actually managing the clients’ assets or where an asset-based fee would not adequately remunerate them, they need a fee structure that remunerates them for the work they do. Advisers also cannot over-service a client to create more remuneration for themselves.”

Ms Wivell expects a trend away from 100% asset-based fee structures to fees that are based on the work done for the client, or a combination. “While the Government is not banning asset-based fees outright, they are making it increasingly inappropriate to charge them,” she said.

Ms Wivell Plater likened the rule to the Government’s current anti-smoking legislation.

“Smoking is not actually banned, but federal and new state legislation make it difficult to smoke anywhere. New anti-smoking legislation introduced this month in NSW, for example, bans smoking in places like transport stops and entrances to NSW public buildings.

“It’s similar to the legislation surrounding asset-based fees. Advisers aren’t specifically banned from charging them – but if they do, they risk either falling foul of the Conflicts Priority Rule or not being adequately remunerated for their work.”

Ms Wivell Plater said many advisers will need to rethink how they charge for their services and this is likely to present a big challenge.

“Setting up an engagement process is key to complying with the new law,” she said.

“Advisers need to understand how to define the terms of engagement from the moment they first meet with a client.  If the service proposition and the client’s fee commitment are clear from the minute the client walks in the door, the financial aspects of client relationships become easier to manage.”

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