On 28 April 2011, the Assistant Treasurer and Minister of Superannuation,
Mr Shorten’s latest ban on commissions and volume-based payments appears to have arrived in the nick of time, or has it? It may be too late for the millions of Australians seeking
Even when the reforms come into effect, the issue of independence will remain. From the 18,000 or so financial advisers currently operating in Australia, around 80% to 85% of these advisers are employed by, or affiliated to, financial organisations and by definition cannot, and will never be, independent. Financial planning houses that charge asset-based
I have stated many times before, that I personally believe it is impossible to modify a structurally corrupt business model – you have to throw it in the air and create a new model. Even so, well done to Mr Shorten for his determination, although we’re still only at the beginning of a long journey.
Even when the changes come into effect, millions of Australians will continue to pay commissions, and thousands of financial advisers will continue to receive commissions and volume-based payments from legacy products and arrangements.
I believe the changes announced by Mr Shorten are a fantastic and courageous start against a barrage of intimidation from certain interest groups. As I commented in my article THE SOAPBOX: Not the time to quibble (financial advice): “… the financial services industry was given countless opportunities to self-regulate but chose not to make the changes necessary to ensure that consumers received advice that was in the best interests of each client. It’s too late to complain now. Let’s try something new, and if it needs to be tweaked at a later date, then so be it.”
The latest changes announced by Mr Shorten are set out below:
- Ban on commissions on insurance products within super. From 1 July 2013, a prospective ban on up-front and trailing commissions and similar payments for both individual and group risk within superannuation from 1 July 2013. Risk products relate to
- Client opt-in every 2 years. From 1 July 2012, a prospective requirement for advisers to get clients to opt-in (or renew) their advice agreement every 2 years. The original announcement was for the opt-in to operate every year, but the 2-year rule is a reasonable compromise to industry concerns over the implementation of this requirement. I have strong views on the opt-in requirement (see my article THE SOAPBOX: Not the time to quibble (financial advice)).
- Ban on volume-based payments. From 1 July 2012, a prospective ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers, including volume rebates from platform providers to dealer groups. This is a huge change because the ban will affect wrap/platform commissions which make up a healthy chunk of financial advising revenues.
- Ban on soft-dollar benefits. From 1 July 2012, a prospective ban on soft dollar benefits, where a benefit is $300 or more (per benefit). The ban does not apply to any benefit provided for the purposes of professional development and administrative IT services if set criteria are met. I expect this change will be the Achille’s heel of the reform package, due to the difficulty in indentifying what fits within the ban, and what is excluded from the ban.
- Introduction of ‘scaled advice’. Expanding a new form of limited advice called scaled advice, which can be provided superannuation
- Limited exemption for basic banking products. A limited carve out from elements of the ban on conflicted remuneration and best interests duty for basic banking products where employees of an Australian Deposit-taking Institution (ADI) are advising on and selling their employer ADI’s basic banking products. Basic banking products are basic deposit products (e.g. savings accounts), first home saver account deposit accounts and non-cash payment products (e.g. travellers cheques and cheque accounts).
The Government also announced the following:
- Exploration of whether the term ‘financial planner/adviser’ should be restricted under the Corporations Act 2001 (Corporations Act). You can expect an almighty battle over this issue.
- Consultation on the formulation of the statutory best interests duty
- Formulating a replacement for the accountants’ licensing exemption.
The Government released an information package explaining these changes in greater detail. You can access this information pack by clicking on this link.
Over the coming months, SuperGuide will explore these reforms in more detail.
Background: The Government originally (in 2010) announced the following financial advice reforms (and they will also be implemented):
- Ban on commissions and volume based payments (from July 2012). No commissions or bonuses when advising or selling retail investment products including managed investments, superannuation and margin loans.
- Introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients. An adviser must place the best interests of their clients ahead of their own when providing personal advice to retail clients.
- Increasing transparency by charging for advice rather than hiding the cost within other charges.
- Annual renewal notice for advice (opt-in). [Now every two years]
- Restrict percentage-based fees to ungeared products or investment amounts.
- Expand the availability of low-cost ‘simple advice’.
I disagree Chris, these changes have to be enforced if our “industry” is ever going to evolve into a “profession”. There is too many financial advisers receiving 1%pa of their clients money or trailing commissions and doing next to nothing for it. Our industry has evolved from insurance salesmen, perhaps if we’d evolved from accounting things would be different. You add clear value to your clients so you’re not going to have any objections to charging fees in a different way in the future. Oh, and please don’t use that under-insurance line, you’re better than that. Insurance salesman are forever saying we have an under-insurance problem here in Australia. Perhaps the reason is because the cost is too high because of the upfront and trail commissions that are paid to advisers. Take those out, reduces the cost by 30%pa or more; suddenly everyone can afford more insurance.
If the rules don’t work, they can always be changed back to the way it was…
Alan M, will never happen? it’s happening; http://www.ifaaa.com.au
Peter M, doing my best to keep the bastards honest…good luck with your studies. Look forward to being able to refer clients to you one day.
I really agree that more independant advisors are needed; if for no other reason than to “Keep the bastards honest.” My wife and I were horribly burned by very bad advice some years back and have been wary ever since, but if you go to one doctor and she botches the job does that mean all doctors are bad? I am a fan of SMSF’s and independant advice on finances and almost anything, but I do understand the need for ‘the big boys’.
I think in time this will all even out and once I complete my current studies, about 2013/14 depending on how fast I do it, the industry will have adapted to upfront fees and fiduciary duties for advisors. This is also why I like this website as I consider the advice to be more honest and independant than can be found elsewhere; even in some uni textbooks.
Keep up the good work, Superguide!
Alan M – Im sorry but I do not agree with your cynical view of financial advice at all – perhaps you have been burnt by some advice in the past. From my perspective I can assure you that I always act in the best interests of my clients, often service them at my own expense, only protect their assets and wealth when they need it and agree to it and if I do convince them to part with their cash – it has only to be to grow it for them.
I do not work for a bank nor use their products, unless it is in the interest of my client to do so. I am sure there are bad advisors out there – but from my experience the vast majorty of us work very hard every day to improve the wealth of our clients, and believe it or not – most of the time we succeed.
The majority of financial advice people are nothing more that wealth transfer agents for the big banks and a large life insurer. The common hidden objective of advice is to convince people to part with their cash.
RE: must act in the best interests of their clients – will never happen.
Cheers
Much of this regulation is a knee jerk reaction to external events and isolated incidents which would have occurred irrespective of the regulatory environment. Surely the absence of any actual “financial crises” in Australia is evidence enough of sufficiently robust regulations and compliance standards. Someone please explain to me how banning commissions on insurance within super will lead to anything other than underinsured consumers!