The solution to the conflicts of interest in financial planning does not lie within the industry. No matter how many financial planning networks follow Godfrey Pembroke’s move to a fee-for-service model, no matter how many individual planners decide to eschew commissions; the underlying structural issues remain; government support is needed to instigate legislative change.
Financial advice is largely being funded by product distribution. Advisers are usually employed by, or tied to, the promoters of products, who use the advice to distribute their products. This process largely relies on the propagation of a lie: that the advice is independent and the advisor is a fiduciary. Clients are looking for help with their finances, but they get sales instead.
This does not mean that all commission-based financial planners have no integrity or that all fee-for-service ones have buckets of it. It simply means the system does not allow the market to work – for good financial advisers (those good at giving advice, not making sales) to rise to the surface and succeed while the dopes and the shonks get weeded out.
The only way to ensure the financial planning industry has integrity is to force clients to pay for the advice they get and to force product manufacturers to stop funding the advice or owning the advisers.
It is often said that trailing commissions are needed because those clients without sufficient assets could not otherwise afford the advice they need. In my view, those who cannot afford to pay a proper price for advice almost certainly don’t need it, and what they do need can probably be provided by an alternate form, such as an accountant charging an hourly rate. A better system would allow financial advisers to offer one or two hour consultations for a few hundred dollars without having to produce a full Statement of Advice.
People with, say, $50,000 to invest do not need an adviser at all: They simply need to pick a decent balanced super fund and go with it, perhaps spending $100 or so on one of the comparison tools in the market. They don’t need to spend $3000 on a Statement of Advice and have trailing commissions deducted from their account balance forever.
The argument that we need product commissions to enable people who would not otherwise be able to afford advice be able to access it is the desperate refuge of scoundrels. Commissions exist to reward sales, not as a mechanism for cross-subsidisation, even that is the effect.
The aim of all ‘good’ financial planners should be a separation of sales and advice and a ban on the ownership of advisory ‘dealer groups’ by banks and other product manufacturers. I recognise that this is easier said than done. This complex and difficult transition would have to be done carefully if no one is to be disadvantaged. In particular, many planners have built up significant goodwill in their firm’s stream of trailing commissions so some grandfathering may be needed.
A way must be found to change the rules. There needs to be a government enquiry, like the Campbell Committee’s inquiry into the financial system in the early 1980s, to produce recommendations for legislative change.
Alan Kohler has been a financial journalist for 37 years and is currently the publisher of The Eureka Report , an online, independent publication for investors