So you come to work, looking forward to a day doing the job you love, and thinking how lucky you are to deal with the people you deal with. For some reason you glance at the front page of the financial papers and these are the headlines glaring back at you. It wouldn’t hurt as much if it were the first time but financial planners have been the targets of choice for quite a few years now. Should you feel sorry for us? No. We are big girls and boys and a little criticism can be a good thing. However, it is worthwhile taking a moment to see whether this “shake-up” of financial planners will result in real benefits to consumers?
Following the losses caused by the Global Financial Crisis, and specific areas that caused greater grief, regulators in Australia have been working to find newer and better ways of protecting investors from unscrupulous and inappropriate advice. This is a good thing, as inappropriate advice can be devastating. Examples raised include failed investment schemes and margin lenders (Timbercorp, Great Southern, FEA, Astarra, Tricom and Opes Prime) and financial planners – with Storm Financial being singled out as the largest group failure to date (although whether the actual losses were a result of faulty advice or faulty implementation of various processes is something being fought over in court right now).
The reasoning given for the loss of money in these cases is most often linked to the concept of inflated sales commissions leading to inappropriate advice being provided, and recommendations to invest that otherwise may not have been made.
A number of financial planning groups have used this as a marketing exercise – proclaiming they are independent/higher principled/better investment advisers/never recommended such investments in the first place because they are inappropriate. The marketing group that refer to themselves as ‘Industry Super Funds’ has used the period of turmoil to further their own ambitious agenda for change. The lobbying groups representing large financial planning groups have crossed swords with those representing accounting groups. It seems there are a lot of very strongly held opinions on what is right and what is wrong.
Are the proposals a good thing? At this stage it is definitely too early to tell, as proposals for legislation don’t always make their way into laws in the same format that they are announced. However, the idea that no commissions can be paid from investment accounts (which would include superannuation accounts) is a good one. It is a pity that the regulators did not take the far simpler route of forcing product providers to include a note of exactly how much was paid to any relevant advisers/internal customer service centres in the regular and annual reports – as this would take the adviser out of the line completely, making it very easy for a client to compare the amount the adviser said they would be paid with the amount actually paid. But then i guess simple solutions don’t really make very good news headlines soundbites, do they?
The key question will be whether the changes will extend to various other forms of incentive that operate within the financial planning industry (every industry has them but in financial planning they should be more visible, as they could lend bias to any recommendations). My guess is that the changes will not go that far. The reason is that it is not in the best interests of the large groups (such as the major banks, large financial planning groups and Industry Funds advisory groups) to have those sources of income stopped.
So the changes will be a good thing but only to a certain point. The central bias which the bulk of the financial planning industry is built on will continue – simply because the big institutions gain big chunks of income from that process.
Although a lot of the issues of Fees, Independence and Bias (FIBS) have been covered in previous posts, here is a quick snapshot of the core areas that remain outstanding, even if adviser commissions are banned…
- Approved Product Lists – these more often than not contain inherent bias. Even though competing company products may be included, there is usually a bias in favour of the group establishing the list (ie, AMP, MLC AXA, BT etc will predominantly recommend their own products and Industry Super funds will predominantly recommend industry super funds etc, etc, etc). The APL is a legislative attempt at improving the quality of advice provided, while doing little more than entrenching established bias.
- Non-direct remuneration – Shelf fees, rebates, marketing allowances and many other forms of payment can be hidden quite easily and even if they are disclosed, it is difficult to work out just what influence they may have on recommendations being made.
- The bulk of financial planners in Australia are either directly or indirectly working for the major banks or the two big non-aligned product providers (AMP and AXA). When a product provider is keen on owning the distribution channels, you can be sure it is not to improve independence!
- Many financial planning firms work with a very limited number of “platforms”. This makes logistical sense but is a limitation which results in a very strong bias towards particular outcomes.
- Many financial planning groups operate with ‘badged’ products or through platforms in which they have a financial interest. Again, a very clear bias that results in specific outcomes.
It seems to me that the debate focussing on HOW an advisor gets paid has somehow managed to completely avoid the issue of bias. Crazy, huh?