Shock as BT cuts grandfathered trailing commissions

Westpac’s BT Financial Advice group has caught the market off-guard with a decision to scrap all ‘grandfathered’ payments.

Westpac’s BT Financial Advice group has caught the market off-guard with a plucky decision to scrap all “grandfathered” payments on its products, including notorious trailing commissions that most people thought had been dropped when the FOFA (Future of Financial Advice) reforms were introduced.

The move will positively affect about 140,000 customers at Westpac, BT and related subsidiaries such as Bank of Melbourne, Bank SA and St George. It will cost BT $14 million in the current half-year with costs declining steadily in future years.

As a corporate gesture the move is nicely timed, well ahead of the royal commission’s report, which may order changes to trailing commissions by the banks.

The Productivity Commission’s recent landmark report on super revealed there were more than 630,000 accounts in the local market still affected by trailing commissions.

What’s more, the move may prompt the rest of the banking sector to also take it on the chin and voluntarily scrap their trailing commission arrangements.

Rival banks and insurers have taken a very different tack to Westpac in the recent past, with both ANZ and AMP signalling at the royal commission that they wished to continue with trailing commissions and effectively warning that the state would have to pay compensation if the commission ordered the end of the practice.

Trailing commissions have been seen as the most objectionable of all commission types — customers pay an ongoing fee to advisers for years after financial advice has been given. Originally created as an alternative to upfront commissions, the idea was that clients would receive ongoing support under the arrangements.

Today, however, customers are often unaware that the commissions exist while financial advisers may do very little work to earn them.

Criticising the lack of transparency around grandfathered trailing commissions, the Productivity Commission said: “Though largely a legacy problem, these commissions can materially erode member balances.”

Westpac has given regular hints it may remain in the wealth advice business while rivals such as CBA, ANZ and NAB have all made moves to reduce their interests in the area through sales or planned sales of key divisions.

Brad Cooper, the chief executive of BT, says the move was taken after careful consideration at the group and covers a wide range of what might have been regarded as conflicted remuneration practices, including payments relating to advice, platform and insurance operations.

Cooper says it will take until October to implement as there are 12 different IT systems involved in the plan.

“The way we look at it, FOFA was put through back in 2013 and I think many people thought conflicted remuneration would be well finished in our industry by now. This is our move to solve the issue,” he says.

Cooper says customers will be better off by anywhere between $51 and $1000 a year depending on the arrangements they had with BT.