Product commission payments to financial planners will be phased out, planners will be paid by consumers, not product manufacturers, for the advice they give, and consumers will have increased powers to “switch off” payments to planners if they do not receive adequate service, under new remuneration principles being promoted by the Financial Planning Association of Australia.
The FPA proposes that the new remuneration regime come into effect on July 1, 2012. The association has give members and the broader community until May 29, 2009, to respond to a consultation paper, Financial Planner Remuneration, released today, outlining six key principles it says should underpin adviser remuneration:
1. Consumers must be able to understand the fees they are paying.
2. Consumers must be able to compare the fees they are paying.
3. Consumers must be presented with a fee structure that is true to label.
4. Consumers must be presented with fees that are separated between advice and product.
5. Consumers must agree the fee with their financial planner and should be able to request that the fee is switched off if no on-going advice is being provided.
6. Consumers should pay for financial planning services, not product providers.
The chief executive officer of the FPA, Jo-Anne Bloch, says the consultation paper “recommends that over a period of time we…should move to a fee-based or client-driven remuneration model”.
“We recognise that the days of commission-based advice are over,” Bloch says. “But what we’re doing, and we need to make this very clear, is ensuring that we do it on a basis that is logical, practical and implementable.”
The FPA proposes that legacy products be respected and that all existing remuneration models – including traditional commission models – be grandfathered under the proposed new provisions. The new provisions will therefore apply only to financial planning services provided after July 1, 2012.
“We’re concerned about legacy products; we believe legacy products should be grandfathered or quarantined,” Bloch says.
“Advice or products implemented prior to that will be grandfathered.”
Bloch says the vast majority of FPA members support its stance. She says she expects opposition from a vocal minority of members, but believes the changes recommended n the paper are crucial to the industry’s long-term viability and in winning back public confidence and tryst.
Bloch says threats by some members to quit the FPA to move to other associations are ultimately hollow – changes that are coming to the structure of the industry and the way financial planners operate will apply to everyone working in the industry, irrespective of what association they belong to.
“We would be disappointed if members choose to move from a professional body to a membership body because, frankly, this is going to apply to everyone at the end of the day,” she says.
“Financial planners who want to be seen as professionals are going to have to face change and face these issues.”
The FPA paper says that despite the convenience and the tax efficiencies inherent in the commission system, traditional commission fails the test of ensuring that the cost and value of financial planning advice is well understood by consumers.
It also fails the test that fees charged by planners should be agreed to by the client. And it fails the test of being easy for consumers to switch advisers should they decide to.
“It is the aim of the FPA to achieve clarity as to the various charging (remuneration) models
that are in use, to ensure that charging models are disclosed clearly and consistently, and to ensure that these charging models align with advice,” the paper says.
“The value of advice is the most important factor in determining whether remuneration is
appropriate or not, and everything we do as a profession should focus on qualifying and then promoting that value.
“Financial planners and their clients also want greater flexibility in the manner in which the fee for advice is negotiated, and managed.
“Providing advice and product by way of commissions does not necessarily ensure that the cost, and value of advice, is well understood by clients, despite the convenience, and tax benefits, inherent in this payment mechanism.
“It is also clear that the movement to transition away from the influence and involvement of product providers is well underway already and the FPA recommends a transition that places the negotiating power directly in the hands of the financial planner (and licensee) and their client.
“The FPA is well aware of the issues relating to legacy products and life insurance. Our
principles and practices canvass the fact that we will have to draw a line in the sand between the past, and the future, to enable sound policy and practice to move ahead.
“This means that we will need to grandfather existing legacy products from these recommendations and concentrate on new advice, products and services from an agreed date to avoid confusion for clients.
“We will also need to consider the difficult economic situation and ensure transition plans are able to accommodate client, business and other practical issues.”
The paper says that “a number of high profile corporate collapses, where high upfront commissions were evident” and “competition in the superannuation sector between retail and industry superannuation funds” mean remuneration is an issue that continues to dominate the policy agenda.
It says that “some practices in the remuneration field that are historic are no longer appropriate, nor are they sustainable going forward as we embed professionalism in financial planning, and as we work to align remuneration with advice”.
“The issue of remuneration is often cited as a key issue of conflict in the profession but it should not be seen in isolation from the other more significant components of professionalism,” the paper says.
“The FPA believes that remuneration is only a minor component of professionalism and is not by itself any indicator of professional practice. Remuneration is an important aspect of delivering advice to clients, and we want to ensure strong guiding principles are in place with clear and consistent definitions of the most common charging models.”