We’re going to look back at this time with disbelief: for so many years the financial services industry was permitted to flog products that weren’t necessarily in the best interests of clients/investors and pretend that this product selling was ‘financial advice’.
On 26 April 2010, the Government finally admitted that the emperor is indeed wearing no clothes and that product selling is not financial advice. Before this Government finally had the courage to cut through the structural corruption that beset the financial advice industry, we have had Australians lose billions of dollars over the years from dubious financial products that paid high commissions to advisers.
Mr Chris Bowen MP, the Minister for Financial Services, Superannuation and Corporate Law released the ‘Future of Financial Advice’ package to overhaul the provision of financial advice in Australia. The package is the Government’s response to the report (Ripoll Report) from the ‘Inquiry into financial products and services in Australia’ submitted by the Parliamentary Joint Committee on Corporations and Financial Services (Ripoll Inquiry).
Must act in the best interests of clients
According to Mr Bowen, the reforms “will see Australian investors receive financial advice that is in their best interests rather than being directed to products as a result of incentives or commissions offered to the financial adviser.”
I have written extensively (see THE SOAPBOX: the 25-year super war) on the free ride that commission-based advisers have received from successive governments, and the total fiction that has prevailed regarding the fact that financial advisers don’t have to act in the best interests of clients – nonsense!
I believe financial advisers have always had a common law fiduciary duty to act in the best interests of clients but the Government, the financial services industry and unbelievably, all the litigation firms have chosen to ignore the possibility that such a view may have merit. Why? Probably because of heavy lobbying from vested interests, but perhaps also because the consequences of such a view prevailing would be financially catastrophic for the financial services and funds management industry in terms of class action.
For now, let’s look forward and congratulate the Government for having the courage to ban commissions, even though the ban doesn’t start until 2012, and only applies to new investments rather than the mega money being creamed from
Although some existing commission arrangements will cease if the Super System Review’s ‘
Key changes to financial advice rules
The Future of Financial Advice reforms will introduce the following changes:
- No more new commissions from 2012. Ban on commissions and volume-based payments and any other type of remuneration structure that creates a conflict of interest for the adviser. The ban applies to all retail investment products including managed investments, superannuation and margin loans but the ban won’t apply to risk
- Must act in the best interests of clients. From 1 July 2012, all financial advisers will be subject to a statutory fiduciary duty to act in the best interests of clients. Under no circumstances will financial advisers be allowed to place their own interests ahead of a client’s interests. And it’s taken this long…
- Introduction of ‘product neutral’ adviser charging regime. The details on this change are yet to be determined, but basically any fee must be paid by the client rather than the product provider, although the financial adviser and client can choose to deduct the fee from the amount being invested. Also, each year, the client has to consent to continuing the client/adviser arrangement before another fee can be charged. The new charging regime should be operating by 1 July 2012.
- Advisers can charge asset-based fees, but not on borrowed money. The client must agree with the asset-based fee. One of the greediest tactics used by some commission-based advisers was to recommend that a client borrow money to invest, and then charge a commission on the borrowed money as well. The Storm Financial debacle was an extreme example of such a practice.
- Intra-fund advice to be expanded. Super funds will be permitted to provide ‘limited’ advice on more issues including:
- Transition-to-retirement pensions (TRIPs)
- Pension advice, about pensions provided by the super fund
- Nomination of beneficiaries
- Superannuation and
- General retirement planning
- Remove exemption for
- Simpler disclosure information for clients. Financial Services Guides (FSG) must be more effective at disclosing any restrictions on the adviser when providing advice, any potential conflicts of interest and how the adviser is remunerated
- ASIC to be given more powers to ban individuals from providing advice.
- Review definitions of retail (unsophisticated) or wholesale (sophisticated) clients.
- Review of professional standards for financial advisers. The Government will appoint a panel to review professional standards, including conduct and competency standards, and potentially a code of ethics.
- Consider possibility of introducing a statutory compensation scheme to compensate clients of financial advisers.
You can find more information on the Federal Government’s ‘Future of Financial Advice’ package by clicking here.
Advisers can charge asset-based fees, but not on borrowed money.
This is progress but in my mind the emperor is still not wearing any clothes on this one. They’ve taken away the incentive to recommend gearing for the sake of increasing an adviser’s fees, but they’ve still left the following incentives on the table:
1) Recommending managed funds over property
2) Recommending investment money into managed funds over debt repayment
3) Recommending platforms as opposed to direct investments
Fees should not be based on how much money someone has. It should be a flat fee based on a service, regardless of how much money someone has. If you’re happy to pay an adviser fees based on Funds Under Management I think you’re being taken for a ride (I doubt that many readers of this website would because they are smart and educated to be here in the first place, but thought I’d throw it out there anyway because it’s still a stain on our profession).
It’s your money. Don’t let someone else take 1%pa of your capital each year, unless they’re beating the market by 2%pa…
And may I just add, does it seem ridiculous to anyone else that commissions are going to be BANNED from July 2012, but today, it's fine. What a joke. It's not fine, they should be cut right now.