Every print or broadcast advertisement from a funds management firm aimed at the end investor invariably carries the line: ‘see your financial adviser’. That’s good advice.

The problem is that most people do not have a financial adviser. While the tide is rising, it still has a long way to go before the majority of people are either willing or able to access at least some advice on their financial affairs.

Since early this year, Conexus Financial, the publisher of this magazine, has organised three meetings of an ad hoc group of industry participants to discuss issues relating to financial planner remu­neration – specifically, how the industry can move away from its reliance on commissions.

The group has consisted of planners, dealer group heads, funds managers, dealer support groups participants, platform providers, an educator, ac­countants and industry funds members.

About the only thing that everyone agrees upon is that the commission system is not the best way for the industry to operate in the long term because of its potential to distort the advice. The big question is that if the industry does continue to move away from commissions, will clients be less likely to seek advice? The jury is still out on this.

At the most recent meeting of this group in No­vember, almost every possible permutation of a fee-for-service system was discussed, including a hybrid model whereby the customer paid a flat fee for ad­vice and commissions on the product placement.

While at least two planners at the meeting were happy with the progress of their practices charging only an hourly rate for advice, the consensus was that such a system is unlikely ever to be universal. “Could I make money more easily charging commissions? Absolutely. But could I live with this? No,” one of those planners said.

However, a negotiable basis points fee over most, if not all, of the client’s assets was thought as more likely to be acceptable to the majority of advisers. But what happens if the best advice a planner can give is to tell someone to pay off the mortgage first, or to set up a trust for existing investments? Neither a basis points fee nor a commission is appropriate in those circumstances.

On the other hand, it was noted by a meeting participant that solicitors often say that the hourly rate system of charging has the potential to reward incompetence or inefficient work.

Remuneration is never pure and rarely simple. It was noted that the industry should be able to sepa­rate the three ‘A’s which are involved in the provision of a financial plan: advice, administration and assets. “We should be able to say clearly how much each of these costs, but we can’t,” one attendee said.

“We don’t think people will pay our fees, so we hide them,” another said.

Certainly, transparency is a given as a noble aim for the industry. It was hoped that people would be prepared to pay for advice when they thought it represented value for money. A lot of people in the industry believe that the form of remuneration is not the major issue, but rather how much the advice costs. But such a view does not address the possibil­ity of commissions distorting the advice.

With no ready answers, the meeting turned to planner ethics. If everyone was fair and ethical and there was real and clear disclosure of fees and costs, then perhaps our problems would be solved. One planner said: “Sometimes I’m ashamed to hand out my business card. You read about unscrupulous planners getting banned by ASIC for one or two years. Why pussy-foot around? Why don’t we ban them for life?”

While improving educational standards was agreed to be a big positive, it was noted that this did not necessarily mean improved ethical standards. For an industry to become a profession, it needed to have ethical standards, one person said. However, another said that FSRA had done its job, making it more difficult to get into the industry and “there is no doubt that the industry is in better shape than it has ever been”.

Notwithstanding all the issues, several partici­pants noted that it would not have been possible to have such an open discussion about planner remu­neration and the quality of advice a few years ago and the group has agreed to continue to meet about once a quarter for the foreseeable future.

For our part, Professional Planner is happy to continue hosting any forum where the aim of the discussion is to improve the industry’s standards and leads to a better outcome for people’s retirements.

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