30/03/2010

The recent decision by the NSW Supreme Court in the Berry Case, that the licensee controls the payment of trail commissions, may have the effect of adding yet another nail in the coffin of commissions as an appropriate payment model for financial planners, particularly if the law is changed to codify the fiduciary duty that ASIC recommended to the Ripoll Inquiry.

 

The proposed planner’s fiduciary duty would prevent the planner from moving the client from a satisfactory investment to another product simply because the planner’s former licensee refused to direct trails from the original investment to the planner.  That would be putting the planner’s interests ahead of the clients and constitute a breach of the fiduciary duty.  It would also likely constitute a breach of the FPA’s ‘Client First’ rule.

 

The Berry Case involved a claim by Julie Berry for trail commissions (‘Adviser Service Fees’).  Berry resigned as an authorised representative of her old licensee and joined a competitor.  She stated she did so not because of any problems with the licensee’s approved platform, but simply due to ‘service issues’.

 

Notwithstanding that she was no longer an authorised representative of her old licensee she nevertheless believed that she should receive the trails payable in relation to those of her clients still using the old licensee’s platform. She argued that a number of documents furnished to the clients when they took out the investments made clear that the trail commissions would be paid consistent with their wishes.  They had directed the licensee to pay those trails to Berry.

 

The NSW Supreme Court found that the trails were paid to the old licensee on trust for the planner but only for as long as the planner was an authorised representative of the licensee.  By leaving that licensee Berry had disentitled herself to the trails.  The basis of the decision was the various contracts between the three parties – Berry, the old licensee and the clients.

 

Where would this situation leave a planner in the future if, as is very likely, the fiduciary duty suggested by ASIC is codified in the law?  Answer – in a very uncomfortable situation.  She could not move the client from the product simply because she was no longer getting the trails.  That would be putting her interests ahead of the clients.  She would have to be able to show that she had moved them to another product predominantly because of the benefit to the client – nothing to do with the benefit she would receive.

 

This would be difficult in Berry’s Case given that she had already stated she did not have a problem with the existing product.

 

If she could not put together a compelling case for a move then she would have to leave the clients in the existing investment in the knowledge that she would get no trails.  She would then have to revise the basis on which she was paid by the client or monitor the client’s portfolio without charge.

 

Faced with the prospect of not being able to move the client for fear of being in breach of fiduciary duty and not receiving any trails for the existing product, planners in the future may have to decide whether to ‘construct’ a case for a move. Would that be simply window dressing to avoid the claim of breach of fiduciary duty? 

 

How easy is it to construct such a case anyway?  The ‘damn lies and statistics’ rule suggests that based on performance stats it would be possible to argue just about anything in comparing products, particularly if you manipulate the performance period under review.  Will it be enough under the fiduciary rule to show some good reasons for a move or will it require a much more comprehensive benefit for the client before the conflict of interest can be said to have been expunged?

 

Alternatively the planner could decide to simply charge fees and do away with the hassle of trails altogether. 
 

If the planner chooses fee for service it will be vital to ensure that the contract with the licensee properly reflects not only the amount that is payable to the planner but also the manner of payment and how trails payable by the product issuer are to be dealt with (e.g. rebated etc).  That contract should deal specifically with the situation that will apply if the parties bring their relationship to an end.
 

If the planner intends to continue using the commission model then a review of the existing contract with their licensee would be advisable in the circumstances to avoid the kind of problems that Julie Berry faced.  If the licensee refuses to pay trails once the planner leaves and refuses to amend the agreement some serious thinking is going to need to be done by the planner. 

 For further information regarding your contractual agreements as a Licensee, please contact Peter Townsend of TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.