Advising Dead People

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To recognise the root of this issue, we need to examine how the industry developed over time. Much of what is recognised as the modern Financial planning industry came about as an adjunct to the sale of products. Investment and Insurance products were sold which led to the payment of commissions to the “adviser” (really a sales agent) who had made the sale. This commission comprised an upfront component for making the sale, and on ongoing component whilst ever the product was still held by the end client. This meant that it was in the interests of the “adviser” to ensure that the client maintained the investment or insurance product. Ongoing relationships with the purchaser of the products thus became paramount, and advisers began to widen the service they provided to more than just the investments held by the client.

With the advent of FSR and FOFA, commissions on investment products were largely removed. A real advice business model emerged which meant that real advisers were providing real ongoing service to clients in exchange for an ongoing fee. Very often this fee was deducted from the balance of the investment product but was not necessarily linked only to the product itself but in the best cases, was charged for advice in relation to the client’s entire financial situation.

Somehow all of this has been forgotten in much of the commentary. If genuine advice is provided in relation to an individual, and the person dies, then no doubt the administrators of the estate could also use some advice, whether it be in connection with the ongoing maintenance of an investment portfolio, or the expedient disposal of the assets to allow distributions to be made to the beneficiaries of the estate. In my experience, the death of a client (which, incidentally, is often traumatic for the adviser as well) can lead to a greatly increased amount of work needed from the adviser.

The reason for this forgetfulness could be tied to a misunderstanding of the real nature of the advice that we provide. Deducting fees from an investment does not necessarily mean that the only advice we provide is in relation to that investment, it is merely a convenient way of collection and payment. FOFA reforms which are now more than 5 years old have meant that the client is fully aware at least annually via a fee disclosure statement of how much they are being charged. In our business we have our clients renew their ongoing service agreement with us every year. Each advice document the client receives discloses the amount they are being charged. In this environment, it is difficult to see how any client could be under any misconception about the cost of our advice. We have even had clients express words to the effect of “enough with the fees already!” In the event of a client death, after discussion with the executors, we enter into an ongoing service agreement with the estate – Is this charging dead people?

Other advisers, of course, will charge for their services to the estate. Most assuredly the solicitors involved will charge for the service they provide to the trustees in the administration of the estate. If for example, the Public Trustee acts as executor for the estate, then they will also charge for their work. Sometimes these fees are charged as a percentage of the assets of the estate. Does anyone believe that this is an inappropriate fee – is this charging dead people?

I fear the discussion is going to descend into a debate about terminology. Post-FOFA, ongoing investment commissions were no longer able to be paid. Many advisers began to charge “advice fees” instead of receiving the ongoing commission revenue stream. Some provided the “advice”, some did not. The fact that an ongoing fee was charged to a deceased person does not necessarily mean that no advice was provided to that person (or their estate). It would be interesting to know that if the same fee had been termed “investment management fee” whether this debate would be had – I suspect not.

I am sure that Justice Kenneth Hayne, and counsels assisting Rowena Orr QC and Michael Hodge QC are well aware of all of this, and that when the report is handed down, findings will not be based on misconceptions. I have no doubt that there will be a prohibition on fees being charged for advice to people who cannot receive advice because they are dead, and that advisers will need to arrange fees with the executors of an estate, Unfortunately, this does not provide commentators with as good a headline as “Fees to Dead People”

In my next article, I will offer a viewpoint on the related “fee for no advice” issue which is also in the air.