Royal Commission and Managed Accounts

After 68 days of hearings, 130 witnesses and over 10,000 public submissions, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry officially released its final recommendations to the public on 4 February 2019.

The IMAP Regulatory Group met two days later to review the Royal Commission’s Final Report, with an emphasis on how the 76 recommendations handed down by Commissioner Kenneth Hayne will impact the managed accounts sector.

Some of the key takeouts emanating from the Royal Commission recommendations include:

  • annual opt-in advice provisions;
  • disclosure of ‘independence’ in the advice process;
  • the removal of grandfathering provisions;
  • a new disciplinary system for financial advisers; and
  • no structural separation of product and advice.

Structural separation

Before dealing with the impact of the individual recommendations on advisers or managed account providers, IMAP believes that the Royal Commission’s treatment of ‘structural separation’ should be considered.

Throughout the Royal Commission, Hayne stated that the most obvious conflicts of interest affecting the provision of financial advice were the conflicts between an adviser’s duty and his/her financial interests, although he accepted they were not the only conflicts.

In fact, in the Royal Commission’s Interim Report, Hayne asked: “How far can, and how far should, there be a separation between providing financial advice and manufacture or sale of financial products?”

He suggested three models for separation:

  • Requiring all advisers to be ‘independent’, as defined by section 923A(2) of the Corporations Act;
  • Requiring separation between any AFSL holder authorised to issue financial products and any AFSL holder authorised to provide financial product advice; and
  • Banning any adviser who is not an ‘independent’ adviser from recommending a related party product.

Clearly, had the Government accepted any recommendation from Hayne on any of these, there would have been a significant impact on any advice firm that was also a managed account provider or had a financial or other interest in a managed account service.

Hayne observed no one, including ASIC, supported the enforced separation of product and advice; and the changes already underway with the industry, including improved education standards, disciplinary procedures, and the sale by large banks of their wealth management divisions, would achieve the desired effect.

He added: “Enforced separation of product and advice would be a very large step to take. It would be both costly and disruptive. I cannot say that the benefits of requiring separation would outweigh the costs… [or] likely to prove an effective regulatory response to competition concerns in the financial system.”

However, this issue is likely to be revisited on a five yearly basis by the Australian Competition and Consumer Commission.

IMAP believes there is an excellent case for a more nuanced approach to statements about independence. An adviser could be “not independent, impartial and unbiased” in regard to the managed account service - for example, because their licensee acts as portfolio manager - but “independent, impartial and unbiased” in regard to any of the investments which it might contain.

ASIC’s Approach – The “Real” Royal Commission Outcome

The direct impact of the Royal Commission’s recommendations may be relatively minor but the real consequence is likely to be the way in which ASIC apply the principles which Hayne has enunciated. A rigorous focus on advisers meeting the Best Interest Duty and a heightened awareness of adviser compliance are both likely to lead to greater structure and systematisation in adviser practices.

The Recommendations and Their Impact

* Ongoing fee arrangements

Recommendation 2.1 Annual renewal and payment

‘Ongoing fee arrangements (whenever made):

* must be renewed annually by the client;

* must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and

  • may neither permit nor require payment of fees from any account held for or on behalf of the client except on the clients express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.’


IMAP: This recommendation should only have a minor impact for existing full advice clients, who will now have to opt-in annually instead of biennially. This opt-in provision will typically be covered off at the annual client review.


MDA providers or platforms offering SMAs that include fee deduction as part of their administrative service, are likely to be more vigilant about client authorisations for ongoing advice fees.


Lack of independence

Recommendation 2.2 Disclosure of lack of independence

'A financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including independent’, ‘impartialand unbiased) must, before providing personal advice to a retail client, give to the client a written statement explaining simply and concisely why the adviser is not independent, impartial and unbiased.’

IMAP: To conform to this recommendation, IMAP expects that the ‘independence statement’ will be included in the FSG, as this is provided to the client before personal advice is provided. The issue here is whether clients actually read the FSG to ascertain whether their adviser is independent or not.

IMAP also believes there is an opportunity for ASIC to achieve real clarity about ‘independence’. An adviser or licensee may not be independent in relation to the provision of the managed account, but may be considered independent in regard to the investments selected for inclusion, or the platform or administrative service it is offered through.

This would materially assist clients in understanding the potential conflicts in the advice they receive.


Quality of advice review

Recommendation 2.3 Review of measures to improve the quality of advice

‘In three yearstime, there should be a review by the Government, in consultation with ASIC, of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022.

The review should consider whether it is necessary to retain the safe harbourprovision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed.’

IMAP: Managed accounts have been an important tool for advisers and licensees to manage the risk of individual investment recommendations but concentrating the test on the service rather than each individual security.

Best Interest Duty is an issue which all advisers using managed accounts appear to take extremely seriously, and IMAP is aware that many explicitly seek legal advice on this issue to ensure they comply. The removal of the Safe Harbour provision, if enacted, will encourage licensees and advisers to demonstrate an even greater awareness of alternative options considered in the provision of personal advice.

From a managed account provider’s perspective, IMAP believes advisers will need help when articulating the benefits of the recommended service, compared to other managed account services, and adviser/client directed investments.

And while demonstrating quality of advice will be beneficial from a managed accounts standpoint, it will require increased training of advisers in relation to the products and services offered by providers.

Conflicted remuneration

Recommendation 2.4 Grandfathered commissions

‘Grandfathering provisions for conflicted remuneration should be repealed as soon as it’s reasonably practicable.’

IMAP: The removal of grandfathering provisions will have a significant impact on many advisers and advice practices relying on traditional advice models. It is unlikely to have any affect on advisers using managed account services.

Recommendation 2.5 Life risk insurance commissions

‘When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.’

IMAP: This is not relevant to managed account services.

Professional discipline of financial advisers

Recommendation 2.7 Reference checking and information sharing

‘All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information-sharing protocols for financial advisers.'

IMAP: This recommendation should have little additional impact specifically on managed account advisers or providers.

Recommendation 2.8 Reporting compliance concerns

‘All AFSL holders should be required, as a condition of their licence, to report serious compliance concernsabout individual financial advisers to ASIC on a quarterly basis.’

IMAP: ASIC needs to properly define what ‘serious’ means, in order for licensees to decide what compliance concerns are appropriately ‘serious’ to report to the regulator. This recommendation may affect the amount of training and product knowledge required by advisers to ensure they adhere to their Best Interest Duty obligations.

Interestingly, in respect to advice, one of the key outcomes of the Royal Commission’s Final Report is the increase in compliance obligations. To the extent that managed accounts minimise the likelihood of individual pieces of advice being inappropriate or failing a step-by-step procedure test, then licensees are more likely to prefer a managed account recommendation as being less likely to lead to non-compliance.

Recommendation 2.9 Misconduct by financial advisers

‘All AFSL holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to a retail client (whether by giving inappropriate advice or otherwise):

* make whatever enquiries are reasonably necessary to determine the nature and full extent of the advisers misconduct; and

  • where there is sufficient information to suggest that an adviser has engaged in misconduct, inform affected clients and remediate those clients promptly.’

IMAP: This recommendation should have little additional impact on advisers.

Recommendation 2.10 A new disciplinary system

‘The law should be amended to establish a new disciplinary system for financial advisers that:

* requires all financial advisers who provide personal financial advice to retail clients to be registered;

* provides for a single, central, disciplinary body;

* requires AFSL holders to report serious compliance concernsto the disciplinary body; and

  • allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body.’

IMAP: It’s expected that all advisers would be required to join this disciplinary body individually. AFS licensees would still be required to monitor and discipline their advisers, however, this new body would provide an additional layer of oversight, absorbing the disciplinary roles currently undertaken by ASIC, adviser associations and the FASEA code-monitoring bodies.


However, no detail has been released about the funding of this new body and whether it will be a cost borne by the Government or industry. However, IMAP expects it will turn out to be the latter.

Superannuation trustees’ obligations

Recommendation 3.2 No deducting advice fees from MySuper accounts

Deduction of any advice fee (other than for intrafund advice) from a MySuper account should be prohibited.’

IMAP: There is likely to be no impact on managed account advisers or providers.

Recommendation 3.3 Limitations on deducting advice fees from super accounts

‘Deduction of any advice fee (other than for intrafund advice) from superannuation accounts other than MySuper accounts should be prohibited, unless the requirements about annual renewal, prior written identification of service and provision of the clients express written authority (Recommendation 2.1) are met.

IMAP: Superannuation trustees are likely to be much more stringent, than has been the case in the past, on the scope of services required to entitle advisers to charge a fee in super. Because managed account services are precisely investment services, advice fees related to the recommendation, review and ongoing monitoring of the service against the client’s goals, would be expected to be allowed under this recommendation.

Hawking super products

Recommendation 3.4 No hawking

‘Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme.’

IMAP: No impact for managed account advisers or providers.

One default super fund

Recommendation 3.5 One default account

‘A person should have only one default super account. To that end, machinery should be developed for staplinga person to a single default account.’

IMAP: No impact for managed account advisers or providers.



Recommendation 6.1 Retain twin peaks

‘The twin peaks’ model of financial regulation should be retained.’

IMAP: No impact for managed account advisers or providers.

Recommendation 6.14 A new oversight authority

'A new oversight authority for APRA and ASIC, independent of Government, should be established to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects. The authority should be comprised of three part-time members and staffed by a permanent secretariat. It should be required to report to the Minister at least biennially.’

IMAP: Essentially, this is a regulator to regulate the regulators. A new oversight authority should not affect advisers, unless the Government decides to fund it through an industry levy.

IMAP encouraged by recommendations

While the Royal Commission’s Final Report was scathing in many respects of the Australian financial services industry, it offered 76 recommendations as a potential blueprint of reform for the industry, which both sides of politics have agreed to take action on.

Treasurer, Josh Frydenberg has announced the Government will take action on all 76 recommendations made by the Royal Commission, including specific measures to implement recommendations that relate mostly to banking and insurance issues.

IMAP Chair, Toby Potter also welcomed the report’s recommendations, saying they were a “sensible and measured” outcome to dealing with systemic issues within the industry, but added that some of the recommendations were open to interpretation.

“There were many considerations for advisers and providers of managed accounts from the Final Report. It’s incredibly positive to see the provision of managed accounts will not be adversely affected as a result of these recommendations. Vertical integration is not banned or structural separation required,” Potter said.

“And while existing conflicted remuneration provisions will continue to prevent payments from product issuers to advisers, some advisers will go further and choose to adopt ‘completely independent’ business models. Others, who have a related party interest in a managed account or any service/product, will need clearer statements of their role and interests, as a result of the ‘why we are not independent’ statement to clients before giving advice.”

IMAP thanks all participants of the IMAP Regulatory Group who took part in analysing the recommendations of the Royal Commission’s Final Report


Adam Seccombe – Chair

Jesse Vermiglio – Holley Nethercote

Bala Shastri – Praemium

Mark Oliver – Macquarie

Claire Wivell Plater – The Fold Legal

Stewart Chandler – AFSL Compliance


Guest Particpants


Brian Pollock – BT Open

Zac Leman – BT

Neil Younger – Fortnum


Quick guide to key recommendations

The following is a summary of the key recommendations and how they are likely to affect financial advisers and providers of managed accounts.

Table 1: Recommendations at a glance

Royal Commission recommendation

Impact of advisers use of, or likelihood of recommending, managed accounts

Impact on managed account providers

2.1 - Annual renewal and payment of advice fees

* Minor impact for existing full advice clients, who will now have to opt-in annually instead of biennially. No impact on new client acquisition.

* Minor impact, as it aligns with the annual review cycle for MDAs.

* Providers more reliant on advisers providing prompt client advice authorisations.

2.2 - Disclosure of lack of independence

* Advisers recommending a managed account service in which they have an interest (financial or otherwise) must clearly set out and disclose they have conflicts and why they recommend this service.

* Managed accounts reduce the instances of ‘personal advice’.

* Notion of independence needs to be carefully considered in the provision of advice.

* Advisers will require assistance in formulating their statement.

* Limitations on the ability of advice AFSLs to receive a share of revenue.

2.3 - Review of measures to improve the quality of advice

* Greater need for advisers to demonstrate the consideration of alternatives in the advice process.

* Greater need for advisers to their own research.

* A preference for outsourcing investment management decisions to avoid the situation where every recommendation is a risk for advisers.

* Potentially some impact on the amount of training required for advisers.

* Need to help advisers consider the benefits of the recommended service in relation to other managed account services and relative to advised/client-directed investments.

* Positive for managed accounts as risk reducers.

* Increased training and CPD requirements.

2.4 - Grandfathered commissions

* Will have a significant impact on many advisers and advice practices.

* The transition to a fee-for-service model will need to be made quickly and has the potential to dramatically impact the revenue and value of financial advice businesses.

* May lead to more people being unadvised.

No impact.

2.5 - Life risk insurance commissions

* Currently unclear whether insurance commissions will be abolished entirely or reduced.

No impact.

2.7 - Reference checking

* Adoption of the Australian Banking Association’s reference checking and information sharing protocol to be made compulsory for all AFS licensees.

No impact.

2.8 - Reporting compliance concerns

* Little expected impact, although it may have a marginal impact on the amount of training and product knowledge required.

* ASIC needs to define what ‘serious’ means in terms of compliance concerns.

* Managed accounts less likely to lead to non-compliance issues.

No impact.

2.9 - Misconduct by financial advisers

* Little expected impact.

No impact.

2.10 - A new disciplinary system

* Little expected impact.

* No details have been released regarding the funding of the new body and whether the cost will be carried by the Government or industry.

* There may be funding costs.

3.2 - No deducting advice fees from MySuper accounts

No impact.

No impact.

3.3 - Limitations on deducting advice fees from super accounts

* See comments in 2.1 but in addition, as already applied by some platforms, advice fees may only be deducted for advice related to super.

* This might create a significant change that is not limited to managed accounts.

* As generally adopted now, managed account fees are a cost of investment consistent with the sole purpose test.

3.4 - No hawking

No impact.

No impact.

3.5 - One default account

No impact.

No impact.

6.1 - Retail ‘twin peaks’

No impact.

No impact.

6.14 - A new oversight authority

* Advisers may be required to fund.

* Providers may be required to fund.

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