Sam Rubin
Knowledge Centre

IOOF Pursuit Select – Practice Planning around Remunerations of Services

By Sam Rubin

The financial planning industry will be transformed into a transparent, high quality profession if the Government implements some of the recommendations from the Ripoll Report and Cooper Review. Our industry’s history is based on the premise that financial advisers are remunerated based on a commission for placing investments which has long been treated as a marketing cost for product providers.

The industry is aware that those days will soon be over. Advisers are going to have to articulate their ongoing value proposition to clients and price accordingly. The issue for many advisers is that they haven’t demonstrated their true ongoing service offer to clients which may mean that they don’t understand what services they are paying for.

Accordingly, the industry’s move to quality of advice will have to involve repricing, as different client scenarios will involve very different initial workload and ongoing support services. For example, a client in their 20s where the adviser has provided a Statement of Advice (SOA) recommendation regarding their super (retain employer sponsored) and determine life cover required vs. a client in pre-retirement with an SMSF and an active investment portfolio with gearing to include short-to-long-term financial goals will require different levels of service.

In moving to a fee for service pricing model, advisers should also consider the tax deductible issues based around the structure of services and payment methods. Currently, SOA fees are not tax deductible. Ongoing trail/adviser services fees may be deductible within the investment. The following is a summary of the tax deductibility of fees able to be charged within the Pursuit Select product range.

Pursuit Select – Superannuation Accumulation

Adviser fees

Tax deductibility

Notes

SOA

Generally no.

If an SOA is invoiced directly to the client, then generally, this cost is not eligible for a tax deduction.

Adviser service fee – upfront

No as a capital expense.

Generally used by advisers to charge clients for an implementation cost. No tax benefit to the fund.

Adviser service fee – ongoing

Deductible in the member’s accumulation account.

Generally charged based on a percentage of FUA/FUM.* 

Adviser service fee – once-off

Deductible in the member’s accumulation account. 

Opportunity to charge clients to cover eg SOA and/or implementation fee. This will be deductible to the super fund.#

Pursuit Select – Superannuation Account Based Pension

Adviser fees

Tax deductibility

Notes

SOA

Generally no.

If an SOA is invoiced directly to the client, then generally, this cost is not eligible for a tax deduction.

Adviser service fee – upfront

No as a capital expense.

Tax exemption environment. No tax deduction available to pension fund and individual.

Adviser service fee - ongoing

No.

Tax exemption environment. No tax deduction available to pension fund and individual.

Adviser service fee – once-off

No.

Tax exemption environment. No tax deduction available to pension fund and individual.

Pursuit Select – Investment Account

Adviser fees

Tax deductibility

Notes

SOA

Generally no.

If an SOA is invoiced directly to the client, then generally, this cost is not eligible to claim a tax deduction.

Adviser service fee – upfront

No as a capital expense.

Generally used by advisers to charge clients for an implementation cost. No tax benefit to investor as it reduces cost base.

Adviser service fee – ongoing

Deductible to the individual investor.

Generally charged based on a percentage of FUA/FUM.* 

Adviser service fee – once-off

Deductible to the individual investor.

Opportunity to charge clients to cover eg SOA and/or implementation fee. This is tax deductible to the individual.#

Pursuit Select – Investment Account – SMSF

Adviser fees

Tax deductibility

Notes

SOA

Generally no.

If an SOA is invoiced to the trustees of an SMSF, this cost may be tax deductible as it is treated as an investment advice costs for the fund.

Adviser service fee – upfront

No as a capital expense.

Generally used by advisers to charge SMSF for implementation costs. No tax benefit to SMSF as it reduces cost base.

Adviser service fee – ongoing

Deductible to the SMSF

Generally charged based on a percentage of FUA/FUM.* 

Adviser service fee – once-off

Deductible to the SMSF

Opportunity to charge SMSF trustees to cover eg SOA and/or implementation fee. This is tax deductible to the fund. If the fund has a segregated asset structure, then the cost could be allocated directly as a deductible expense to the member’s account.

*An ongoing adviser service fee can be charged based on a percentage or dollar value per month of FUM. For superannuation accumulation investments, the fee can only be claimed as a tax deduction within the member account. Advisers have the option to make these fees more economical for clients by understanding the tax deductibility.

#A once-off adviser service fee can allow an adviser to tailor their fee structure around a client’s requirement. Advisers that charge a separate SOA fee and an initial implementation fee could offer the client an alternative payment method via structuring the fee as an initial advice fee. If it is charged within the investment account, it will be a claimable tax deduction to the individual.

In general, advisers will charge the fee (once-off and ongoing) out of the pension account when recommending a client to commence a ‘transition to retirement strategy’ (TTR), as it will most likely be the higher account balance. It may be best to charge via the accumulation account in order to maximise the tax deductibility. This way, it will provide tax efficiency with the super contribution component of the strategy.

Example one – Maximising tax deductibility for super and pension client

Dan, aged 60, has recently been to see you on advice regarding opportunities with his $500,000 Pursuit Select Superannuation Account. You recommended a TTR strategy which will involve rolling $490,000 into a Pursuit Select Pension Account and commence a pension whilst salary sacrificing $30,000 into super annually.

You discuss an initial fee for the advice of $10,000 and an ongoing advice fee of $5,000 pa.

If the fee is paid out of the pension account, no tax benefit is provided, so the net after tax fee will be $15,000 in the first year. If you directed the fee to be paid via the accumulation account, the after tax fee will be $12,750, which is a saving of $2,250 for Dan.

Example two – Maximising tax deductibility for super/pension and investment account client

John, aged 45, is seeking your professional advice on his financial long term objectives. He has a Pursuit Select Investment Account valued at $500,000 which is 50 per cent geared and also has a Pursuit Select Superannuation Account valued at $200,000. John’s marginal tax rate is 39.5 per cent. You would normally charge a one per cent ongoing adviser service fee on each of the investments which would equate to net after tax fees of $1,700 pa [2,000*(1-0.15)] and $3,025 pa [5,000*(1-0.395)].

In order to maximise your clients taxation benefits, you could restructure your ongoing adviser service fee to a net after tax fee of $4,235 pa [$7,000*(1-0.395)] being charged to the investment account. This will provide an additional benefit of $490 pa back to John.

Conclusion

The industry and the Government have confirmed that trail commissions and rebates to Licensees will become a thing of the past. They want to reshape the current industry into a high quality financial advice industry. Financial planners that don’t charge via a fee for service basis will soon be forced to do so. This means that advisers will have to be able to articulate their service proposition. Clients who understand the types of service they are paying for should also have the option of knowing how they are being charged for these services.

The IOOF Pursuit Select product range has been designed to provide greater flexibility and transparency around adviser fees. It offers the benefit of maximising the tax efficiency of the payment of those services.