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Now that it has done the impossible by winning the election, will the Coalition do the improbable by keeping its pre-election promises to improve the quality of financial advice?
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, over a period of some 18 months, reviewed over 10,000 submissions and interviewed, very publicly (and on occasion very dramatically) 130 witnesses. What was exposed by Commissioner Ken Hayne was a shocking culture in which industry prioritised its own interests often to the detriment of the customer.
There were 76 recommendations made by the Royal Commission in February this year and the Treasurer, Josh Frydenberg, undertook to “take action” on all of them. “My message to the financial sector is that misconduct must end and the interests of consumers must now come first,” he said.
There is enormous complexity in the 1100 pages that explain the Royal Commission’s recommendations however there are some key points the Commissioner made that, if implemented, go a long way to improving the quality of the advice you’re entitled to.
Working with a financial adviser
Several recommendations deal directly with the way you interact with your financial adviser so as to increase the quality of advice and value for money for the advice you’re paying for. Under these provisions financial advisers would be required to:
- disclose whether they are independent under the law and, if not, explain the reasons why, and
- proactively ask you each year to renew any ongoing service you are obtaining from them.
Conduct and reward
Because there is a very strong connection between conduct and reward, the way your adviser wants to be paid is noteworthy. Conflicted remuneration (like commissions and fees linked to how much you invest) has been found to erode the quality of advice in ‘Shadow Shopping’ exercises run by the ASIC for well over a decade and although the Royal Commission didn’t ban conflicted remuneration immediately, it did recommend that this should be the goal.
Australians’ superannuation savings represents a very large pool of wealth and therefore the way it is managed is crucial. Key initiatives the Coalition promised are:
- To ban advice fee deductions from MySuper accounts, and
- To place conditions on the purpose for which fees may be deducted from super accounts generally.
Together, these initiatives are designed to preserve members’ funds and ensure they are being managed in the way the legislation intended.
A checklist for quality advice
The Royal Commission released its recommendations in February and the government immediately announced their intentions to follow through. Whereas we expected these reforms in financial services to feature in the government’s election campaigning, barely a word was uttered.
Why wait for the government to act?
Whether the Coalition delivers on its promises or not, there IS something YOU can do to look out for yourself when navigating the self-interested financial services industry. We suggest you use the recommendations from the Royal Commission as a checklist for ensuring the adviser you deal with is of a high quality:
- Are you independent under the law (and if not, why not)?
- Can you list what services you are offering to provide me?
- Do you charge fees in a way that is completely divorced from any transactions I enter into?
- Will you refund to me any commissions payable from products I buy?
- If I hire you ongoing, will you pause at 12 months to review what you’ve provided and plan out what we’re going to do together next year?
Take Commissioner Hayne’s advice and, when next you seek financial advice, give yourself the best chance of working with a quality adviser.
Daniel Brammall is President of the Profession of Independent Financial Advisers (PIFA), formerly known as the Independent Financial Advisers Association of Australia (IFAAA). All members of the PIFA uphold the Gold Standard of IndependenceTM.