Adviser exit fees fail transparency test
The managing director of boutique licensee Australian Mortgage and Financial Advisers (AMAFA) Keith Marhsall has hit out at licensees who “dress exit fees up as professional indemnity (PI) run-off cover.
He claims these AFSLs fail the transparency test and undermine adviser trust.
“When licensees label what is essentially a commercial recovery fee as run-off cover, it raises questions around honesty and transparency,” he says. “Advisers are expected to be open and upfront with clients, the same principle should apply to licensees.”
Marshall says that in most cases no additional premium is incurred when an adviser leaves a licensee and the PI policy remains active, meaning a run-off cover fee cannot be justified.
“Some licensees defend the practice by claiming their PI premiums don’t fall when an adviser leaves, even though revenue does, but that argument goes around in circles,” he says.
“If a licensee replaces the lost revenue when an adviser moves on, as most do, their overall PI exposure remains covered and generally reduces over time. The issue arises when they can’t replace the revenue and therefore feel the premium impact. But that’s a business issue, not an insurance issue, and exiting advisers shouldn’t have to wear it.”
In a statement specifically highlighting the issue, Marshall noted that PI insurance operates on a claims-made basis, meaning cover applies when a claim is made, not when the advice was given. While AFSLs must maintain cover for current and former representatives, it doesn’t automatically generate new costs when an adviser leaves.
“Where there’s an unresolved complaint or a genuine increase in risk, recovering specific costs such as an excess or additional premium is fair,” he says. “But where an adviser simply transitions elsewhere, calling it run-off cover misrepresents what’s actually happening.”
He adds that it’s unfair to charge advisers for run-off cover because they have no practical way to obtain their own policy. “Getting standalone PI run-off cover is almost impossible for individual financial advisers.”
Marshall says clarity and transparency around exit fees would help promote greater trust across the industry.
“If an adviser chooses to leave a licensee, we believe that decision should be respected, and their exit made as smooth as possible. Where any costs are involved, they should be transparent and clearly explained. It’s about being open, fair and proportionate – and doing the right thing by advisers.”
Interprac brought this in, in 2024 after they knew ASIC were investigating but before any of their practices who aren’t involved in the Shield or First Guardian fiasco, knew.
As a result, 2 years PI premiums as a lump sum plus current year pi to leave (3 years as a lump sum before clients can be transferred), for businesses who had nothing to do with the current ASIC attention, but want to leave.
Wealth Today employ this practice. Be aware speak with other advisers who have successfully been able to leave the group before joining.
I totally agree with the key point about transparency. It should be a free and fair market, not one where hidden fees and penalties apply when an adviser chooses to change licensee. Greater visibility on this is essential. I think it is also important that there is transparency on this issue, so that if the fee for run-off cover is not actually paid to an insurer, but instead retained by the licensee (as seems to be the practice), then this should be clearly disclosed. I am certainly hearing stories about Interprac advisers seeking to leave, who are advised of this requirement to pay for run-off cover. The adviser can’t leave, or arrange to transfer their clients without paying. This is just totally wrong.
But this “run-off cover”, is never refunded if no claim is made, correct?
It is a disgraceful practise and the Licensees involved in doing this so should be exposed and made to refund the money paid with interest to all advisers who were literally hijacked by this so called exit fee or PI run off. I know one dealer group from the Sunshine coast has made an art form of this nasty unethical practice.