Its fair to say the financial planning industry is not having a good GFC. Storm, TimberCorp and Great Southern have compounded growing concern about the ‘structural corruption’ of the commission system inherent in the financial planning industry. As the tide went out, financial planners were caught without their swimmers on, and the view from the beach has been ugly.
In response, financial planners have embarked on a re-branding exercise, following in the steps of many global and domestic brands. The purpose of a re-brand is typically to alter perceptions rather than substance.
Thus, Phillip Morris is now Altria. Kentucky Fried Chicken has become KFC. Exxon Valdez became Sea River Mediterranean. And commissions have become asset based fees. The only trouble is, they still erode your super and create conflicts of interest for financial planners.
Conflicted remuneration practices
The financial planning industry recognises it has a perception problem but does not want to treat the underlying cause – conflicted remuneration practices - and so has opted for the industrial strength smoke and mirrors machine, and commissions become ‘asset based fees’.
The re-branding of commissions is in full swing, but not everyone is buying the latest sales pitch by financial planners. The industry super movement, consumer group CHOICE, regulators and many in the media are sceptical. For good reason.
Asset based fees in the super industry are commonplace, and coming under greater scrutiny. Many wholesale funds managers charge asset based fees, as do some funds – both industry and retail. However, in the context of personal financial advice, they share the same DNA as commissions. They do not eliminate conflicts of interest, nor are they intended to.
Asset based fees
Asset based fees are dependent upon the preparedness of a product issuer to permit such fees (and their quantum) to be deducted from a member’s account and therefore paying for advice in this way is contingent on the sale of a particular product.
They are ongoing in nature (the ‘trail’ in trail commissions) and therefore not necessarily reflective of the advice received by the consumer.
As with commissions there is not necessarily a relationship between the cost of providing the advice and the amount paid by the consumer, which will often mean that over time, consumers pay for a lot more advice than they receive.
Investment products with a longer term horizon, such as superannuation, asset based fees have the same compounding effect on a workers super balance as commissions. As a rule of thumb, an asset based fee/commission of 0.5% per annum could result in 10% less super over forty years.
Focus on consumers not industry needs
Asset based fees can in some cases cause serious conflicts where advisers are motivated to increase funds under management or gearing to increase their own remuneration (Storm being an extreme example) or to favour product sales rather than strategic advice (i.e. to pay off your mortgage).
Asset based fees are by nature percentage based and so are more difficult for consumers to understand and negotiate.
In short, asset based fees are inconsistent with a financial planner acting in their client’s best interests.
The debate about financial advice needs to be orientated to what consumers need, not what best suits the industry. Given the low levels of financial literacy, the regulation of advice needs to be biased heavily in favour of consumers, not financial planners.
Peoples' right to best interests
People have a right to expect that a financial planner will act exclusively in their best interests, rather than a complex ‘clients first’ methodology. A fiduciary obligation is to one person, not a sophisticated ranking system of obligations. (Watch with interest as the financial planning industry haggles over the definition of “best interests” and ‘fiduciary obligation”).
Commissions and all forms of conflicted remuneration need to be banned. Financial planners should be required, by law, to act in the best interests of their clients. Financial advice should be paid for on an hourly basis. Regulations need to be amended to ensure that the payment for this advice is tax-deductible and can be deducted from a super account or other managed investment scheme.
Importantly consumers should only pay for the advice that they receive, and should decide whether they want or need the advice. Ongoing asset based fees do not meet any of this criteria.
Global push on financial planning
There is a global push for financial planners to act in the best interests of their clients and for conflicted forms of remuneration to be banned. Both the Obama Administration in the US and the UK’s Financial Services Authority (FSA) are advocating such regulatory change.
The Australian financial planning industry would be better served by leading the inevitable transformation into a profession, rather than indulging in self-defeating re-branding exercises in the hope of coming out of the other side of the GFC largely unscathed.
The scepticism about voluntary codes is already turning to cynicism. This is one re-branding exercise that is self-defeating and destined for failure.
David Whiteley is the spokesperson for Industry Super Network (ISN), an umbrella organisation for the industry super movement.
Disclaimer
The opinions above are those of the author in his capacity as spokesperson for Industry Super Network. The Network, authors and all other persons involved in the preparation and distribution of this web site are not thereby giving legal or other professional advice and hence do not accept any responsibility for the accuracy of any of the opinions or information contained in the site.
Consider your own objectives, financial situation and needs before making a decision about superannuation because they are not taken into account in this information. You should consider the Product Disclosure Statement available from individual funds before making an investment decision.