Commissions, fees and conflicts of interest. For too long these issues have been thrown at financial planners like mud, and unfortunately much of it has stuck. It seems that these issues are referred to by the media as often as financial planning itself.
It has come to the point where the work done by financial planners to improve the lives and livelihoods of their clients is completely overshadowed by accusations of self-interest and bias.
For financial planning to move forward, we need to throw off the shackles of the past.
And it was with the future viability of financial planning firmly in mind that the FPA board approved the Financial Planner Remuneration consultation paper. We are asking members and the community to consider six principles that underpin remuneration practice, along with charging structures and definitions. Significantly, we are also recommending that from a date in the future, say July 1, 2012, client-directed charging models become standard practice for FPA members.
By seizing the initiative now, we take a leadership role in the debate and can work toward outcomes that are practical, logical, and achievable. For example, we know that legacy products are impossible to change so let’s grandfather them. We need to do more work on life insurance products and that work will start shortly. We know that some members have long-standing commission-only businesses and we need to be sensitive to this and arrive at workable solutions.
Judging by some of the comments being made, the FPA still has much to do to explain our proposals. Let me address a few myths and misconceptions that have already cropped up.
1. That the FPA is promoting only hourly rates.
The FPA certainly acknowledges that hourly rates or time-based charging alone can be too limiting and does not accommodate the ability to amortise fees over time for clients who cannot afford to write a cheque. We need some flexibility for clients – as long as they are in the driving seat, the payment comes from their account, and the payment can be switched off if a service is no longer required. Our paper therefore describes three types of client-directed fees.
2. That product providers can no longer assist with payments.
Product providers are still able to administer or facilitate the payment, as directed by the licensee or financial planner. Financial planners will not be required to establish separate charging mechanisms where product capability exists.
3. That salaried planners are not included.
Salary-based advice, or advice that is paid for by a trustee or administrator, should be disclosed. There is no such thing as “free” advice, or advice “at no cost” and we want to make this very clear in disclosure statements.
4. That the FPA is dictating what a financial planner charges a client.
This is quite incorrect. The FPA is suggesting principles to underpin remuneration practice, and the charging models that are commonly used by Australian Financial Services Licensees (AFSLs), along with definitions to facilitate greater consistency and comparability.
We have much more to gain than we have to lose by taking this big step forward. By showing clients the true cost of the advice they are being provided, they will understand the true value of it. By being able to pay for just the services they want and not for the things they don’t, clients will feel more in control. Best of all, neither they, nor the media, will be concerned anymore about whether the products they’ve invested in were chosen for the right or the wrong reasons.
We have had many financial planners write in or call us to say that they have never looked back after changing from a commission to a fee-based model. Particularly now, a fee-based model has proven good for business. If we recognise this opportunity for what it is then we will reap the benefits and the rewards, and that must be good for the profession, and the community that we serve.
