The big question financial planners ask most frequently is this: Will the Government really legislate to ban commissions, and all other forms of product-directed remuneration, across all products, including life insurance?
In other words, will the Government adopt the Australian Securities and Investments Commission’s (ASIC’s) recommendations to the Parliamentary Joint Committee (PJC) Inquiry, rather than those of the Financial Planning Association (FPA), Treasury and many other industry participants? I don’t have a crystal ball, but I can certainly speculate, based on various debates and discussions that we’ve heard as we walk the halls of Parliament House and engage with key stakeholders. So here goes. We specifically recommended that the Government should not regulate remuneration, and that, instead, the industry should take the lead, so as to better manage implementation and transition issues.
As such, the FPA’s remuneration policy requires FPA members to transition away from commission-based advice over the next three years, towards client-directed payments, rather than product-directed payments. In practice this means that asset-based fees are allowed, along with hourly or fixed rates. ASIC’s submission to the PJC, on the other hand, recommended a ban on all product-directed remuneration payments, and asset-based fees, because they might create bias in the advice given. So can the Government legislate to ban commissions – never mind will they?
Yes, of course they can, and they will, if the industry cannot demonstrate that it can facilitate an appropriate policy that meets community expectations, as well as those of the industry. There might be a few administrative and legal issues to contend with, but Ministers Sherry and Bowen have both made it very clear there will be legislation if there’s no self-regulation. There is a view emerging, from the discussions mentioned above, that because membership of a professional association is voluntary, and because professional standards, complaints and disciplinary processes are self-regulatory, the Government has no choice but to legislate to remove conflicts and biases in remuneration across the whole sector.
Even if professional associations adopt higher standards, financial planners could opt out and not join these bodies if it isn’t compulsory to do so. We know that at least 30 per cent of practising financial planners are not members of the FPA, nor of any other association.
They might seek refuge under FPA principal membership (where the Australian Financial Services Licensee (AFSL) is a member of the FPA and therefore has responsibility for the conduct of all its representatives), but we know that’s not good enough anymore. Further, the furore that followed the FPA’s release of the Financial Planner Remuneration consultation paper in May, 2009, highlighted to the Government that our industry was very far from united. Even if it was the minority that expressed their views so vociferously, the Government had a taste of what would come with voluntary adoption of commission- free advice.
So how do we achieve a set of remuneration policies and principles that stack up for the profession, the industry, and the public? First, let’s agree that consumers need advice, and all should be able to afford advice irrespective of their financial position. They also need trusted advice which must therefore come from professional, qualified and competent financial planners. Clients should be able to afford advice, and structure payments to suit their situation. Second, let’s agree that commissions are dead, for advice.
Product directed payments for advice are no longer sustainable, desirable, nor suitable. Choice between commissions and fees hasn’t worked, and the arguments are now dated. Importantly though, our focus here is on the role of advice. There are many risk advisers and mortgage brokers, for example, who provide very limited advice relating directly to a product, and predominantly deliver a product solution, and they should not be caught in this framework. This framework is about advice, not product.
Third, let’s agree that financial planners must control their destiny with their clients. Despite the contribution made by AFSLs and the legal liability that the AFSL has, the client’s most direct relationship is with their professional planner. A fiduciary duty demands that the best interests of the client lie at the heart of that planner-client relationship. Fourth, let’s be very clear about the role and value of product-directed payments to AFSLs. Some payments genuinely contribute to the viability of an AFSL and reduce the costs that would otherwise be borne by clients, whilst some other payments create the potential for biased advice.
It is time to sort out those differences. Fifth, let’s be honest and admit that disclosure is not a panacea to all conflicts. A client must be able to understand the costs they are paying (for advice and for products), truthfully compare them with other models, and make a choice. They should also be able to align the remuneration with a service that they want and agree to. It is no longer sufficient to simply disclose everything and hope that the client understands something. And finally, if we can agree on this, we can agree on implementation. Should the industry be left to determine the details, or should the Government prescribe the details in the law? If we could get this far as an industry, why would the Government want to step into territory for which it has little expertise and probably little motivation?
This is the debate we have to have. If the community is to trust and believe in the profession of financial planning we must move to genuine transparency and advice free from bias. This debate has been raging for ears, but it has never progressed this far, because the good times prevailed. However, the global financial crisis, consumer and government distrust, and a series of corporate collapses and product failures have now presented the perfect environment to address constructive change, once and for all.
