In December last year the new government announced how it was going to ‘make financial advice more affordable’ by amending the previous government’s ‘Future of Financial Advice’ (FOFA) proposals (1).
Recall that the FOFA legislation was introduced in response to hundreds of millions of dollars of Australians’ savings being lost in the corporate collapses of investments like Opes Prime and Westpoint, as well as financial planners like Storm Financial. These spectacular corporate implosions and the actions of incentivised planners largely took place between 2005 and 2007 — in what we now remember as the good times, before the GFC. Of the nearly $400m invested in the Westpoint group of companies, nearly half was recommended by financial planners (2).
Given that financial planners propose to advise us on the $1.5 trillion we have in superannuation (4), what do we do about the Financial Services industry’s pink elephant: is this a sales or advice industry?
In 2009 this prompted an investigation into the Financial Services industry by the Parliamentary Joint Committee on Corporations and Financial Services (3) which asked the question “what is the role of financial advisers in this country?”.
The answer was unambiguous: “On the one hand, clients seek out financial advisers to obtain professional guidance on the investment decisions that will serve their interest, particularly with a view to maximising retirement income. On the other hand, financial advisers act as a critical distribution channel for financial product manufacturers, often through vertically integrated business models or the payment of commissions and other remuneration-based incentives” (3). The ASIC, as Financial Services watchdog, was more strident: “Remuneration structures used in the financial advice industry create real and potential conflicts of interest that can distort the quality of advice (5).” The ASIC says that not only are conflicts of interest inconsistent with providing quality advice but they are often not evident to consumers. It believes the most effective way to deal with this is to remove the remuneration structures that give rise to these conflicts.
What could that look like? Simple: to hold yourself out to be a financial adviser, you must be impartial. This means no links to product manufacturers, no commissions and no ‘asset fees’ (commissions by another name). This doesn’t necessarily mean that no one can work for a bank or insurer anymore. It just means that you can’t hold yourself out to be giving impartial advice.
However on the whole the Financial Services industry is not set up that way. Of the 18,000 financial planners in this country, four out of five are owned by a bank or insurance company. Of the remainder, virtually all of them receive commissions or charge fees calculated on the size of your wallet. In fact, fewer than 30 advisers Australia-wide appear to meet these criteria (8). A small band of independents is gathering under the brand of the Independent Financial Advisers Association of Australia (IFAAA) which last year trademarked a ‘Gold Standard of Independence’, specifically forbidding these three conflicts.
The big end of town, though, has influenced the new government to the extent that the issue of conflicts has been quietly brushed under the carpet. Last week the Assistant Treasurer said: “The current ban on conflicted remuneration captures a far wider range of circumstances than was originally intended and has resulted in significant compliance costs for industry” (7).
Here’s the point …
Many thousands of Australians collectively lost hundreds of millions of dollars – some of them their life savings – in collapses like Westpoint. Conflicts of interest was primarily behind it and the intention of FOFA was to avoid this ever happening again. However the new government is dismantling the reforms because industry has convinced them it costs too much. In doing so industry has successfully transferred the cost to the consumer because without reforms that squarely address conflicts of interest, Westpoint will most certainly happen again.
— Daniel Brammall, Brocktons Independent Advisory
(7) “Retreat on planners to hit investors”, AFR 8 February 2014.