If professionalism in financial advice means no sales commissions, I probably have to accept that the majority of the industry will never voluntarily embrace it. The financial reward of the value of all that future cash flow is just too great to be surrendered, except by the few who have a clear alternative vision and a longer-term view. But maybe it’s not too late to at least differentiate the planning industry from the most blatant pockets of commission-driven flogging. For several years now, many small-scale commercial property developers, together with residential and retirement village developers, have relied heavily on financial planning firms to achieve turnover.
At commissions of 6 per cent to 12 per cent this has been quite rational for the developers, who can effectively displace direct sales costs and achieve better sales rates by co-opting the (now fading?) imprimatur of a licensed planner. For the planner, however, this practice too often involves a recommendation of an asset about which the adviser has no specialist knowledge or experience and often involves an inappropriately high portfolio weighting to a single asset. So far this situation has only infrequently manifested itself in scandal, usually as a result of inappropriate financing arrangements or outright fraud. It has not become calamitous because, thanks to a growing population, Australia has generally been shielded from sharp falls in residential values.
But consider the cumulative impact of a 10 per cent commission, a 5 per cent stamp duty (if not paid by the investor, it will still have to be factored in by any subsequent buyer), a 9 per cent per annum cost of money, in a market that emulated the US housing market. Total employment is the key number to watch, and I think it is more likely than not that Australia will muddle its way through the current world slowdown. But the risks are real and this would be a very good time for the financial planning industry to consider where it draws the line.