AMP faces $1.5bn bill to buy out planners

A ban on recurring advice fees could accelerate the exit of advisers from AMP, making it a buyer of last resort.

AMP could be forced to become the buyer of last resort for advice businesses. Picture: Hollie Adams

Royal commission recommendations to clamp down on recurring financial advice fees are likely to accelerate the exit of AMP-aligned advisers from the industry, forcing the wealth manager to become the buyer of last resort for their businesses.

The prospect that royal commissioner Kenneth Hayne would propose a ban on grandfathered trailing commissions had already stoked concerns that a number of AMP licensees and authorised advisers would sell up under their so-called buyer-of-last-resort agreement, potentially ramping up the wealth manager’s liability.

The agreements oblige AMP to purchase a licensee’s business at four times recurring revenue.

While grandfathered commissions are believed to make up less than 20 per cent of adviser revenue, Mr Hayne’s proposals to limit the ability of companies to deduct fees on super products will further reduce the value of many advice licensees.

AMP will today announce its full-year profit, expected at just $30 million, following a torrid year for the wealth manager at the hands of the royal commission, where it was revealed the company repeatedly misled the corporate regulator and charged thousands of clients fees for financial advice that was never provided.

AMP is expected to face remediation costs of as much as $1bn for advice that was improper or not given.

The future is uncertain for the company, which has copped an investor backlash over proposals to sell its life insurance business, the full impact of super reforms that are yet to pass parliament, and the implications of the royal commission recommendations.

In his final report, released this month, Mr Hayne said charging advice fees on “choice” superannuation products — products customers are usually tipped in after they have received advice — should be banned if the company cannot gain annual approval from the customer to continue to charge the fee.

“If ongoing advice fees continue to be permitted, they should be tightly controlled,” Mr Hayne said.

“Two years without confirmation that the member wishes the arrangement to continue is too long. Two years is too long not only for the member, but also for the trustee.

“As the case studies showed, the existence of ongoing advice fee arrangements poses a danger to trustees: if they permit ongoing advice fees to be deducted, and no service is provided, they are likely to be in breach of their obligations under the SIS Act.”

Last Friday AMP held a forum for licensees and authorised representatives at which there was no indication that the company would be changing its buyer-of-last-resort contracts.

According to Shaw & Partners, AMP’s liability, if grandfathered commissions were banned, would be $1.5bn. If advisers were cut off from recurrent financial advice revenue on “choice” super members, the liability could rise even higher.

An AMP spokeswoman said the company “actively manages” the licensees and engages in succession planning with its principals.

“(Buyer-of-last-resort) terms are based on a number of factors and AMP continues to monitor, review and engage with advisers on these terms, given changes in the market, including the removal of grandfathered commissions,” AMP said.

One industry consultant told The Australian many advisers were likely to bring forward retirement if they were cut off from recurrent advice revenue.

“If you’re charging fees, technically every year you would now have to re-sell the fee to the customer,” the consultant said.

The prospect of the falling value of licensee businesses also raised concerns about debt covenants held by planners who had loans.

AMP often sells businesses that it buys through the buyer-of-last-resort scheme to new entrants into the market, who are encouraged to take a loan from AMP Bank to purchase the financial advice portfolio, based on the value of the trailing commissions and recurrent revenue.

One AMP adviser told The Australian advisers were concerned about debt covenants if the value of their businesses was suddenly demolished by banning grandfathered commissions and limiting fee revenue. The amount of recurrent revenue dependent on grandfathered commissions could be anywhere up to 50 per cent of an individual business.

In its 2017 update of its buyer-of-last-resort contract, AMP said it would assess the state and quality of all client files before it agreed to buy a planner’s business. If more than 15 per cent of examined files are found to be non-compliant, AMP has the right to discount the purchase.

However, as many licensees that rely on grandfathered revenues are owned by older financial advice businesses, the planners are likely to be on the old contract.