A great deal was expected from the Parliamentary Joint Committee (PJC) report into financial products and services. Like many things in life, the anticipation overwhelmed the reality. There was a sense of anti-climax when the report was released.
Some hoped it might contain at least one “big bang” proposal – one that would turn the financial planning industry around and set it, indisputably, on the path to professionalism and, hence, greater public support and confidence. The fact that it did not contain such proposals says less about the inquiry itself than it does about how ingrained some of the industry issues are that it addressed, and how delicately some things must be picked apart before they can be properly addressed.
No one involved in financial planning should regard the report as weak or compromised. Its recommendations, seemingly innocuous in many respects, could yet turn the industry on its head. On the night that the chair of the PJC, Bernie Ripoll, tabled the report in Parliament, he spoke to Professional Planner. He sounded like a relieved man, and with good reason.
Finally, he said, he could talk about what was actually in the report, rather than having to tell everyone to wait and see. Ripoll is a smart bloke: the pace at which he brought himself up to speed on the industry was impressive. I don’t think there was anyone who attended the Professional Planner roundtable event (reported in the magazine’s June-July edition) who wasn’t thoroughly impressed with his grasp of the issues.
He’s a thoughtful bloke, too. He says that when he learned of the havoc wrought by Storm Financial, he jumped to the conclusion that Storm clients were greedy, and chasing unrealistically high returns, without due consideration of the risks. But he soon changed his mind. After talking to Storm clients directly, he gained a valuable insight: most clients didn’t know what a “high” return was to begin with.
They had no point of reference, were largely uneducated in financial matters, and trusted an advice model – and by extension, an advice industry – that didn’t serve them well at all. So he was well aware of what needed to be fixed, and understood acutely how the financial planning industry, as it’s currently structured, needed to be tackled to best achieve real, practical change that works in favour of consumers but doesn’t put planners out of business overnight.
In the two months since the report was tabled, a lot has been said and a lot written about its likely impact. The mainstream media has focussed on what it perceives as a missed opportunity to eliminate commissions once and for all. Some hoped that the inquiry might come out and recommend an explicit ban – a legislated ban – on commissions (that is, payments from product manufacturers to financial advisers).
But Ripoll told Professional Planner that the recommendation shouldn’t be underestimated. He said it meant all commission-style payments to all financial planners – and that means individual financial planners, planning firms, dealer groups. The lot. Think about that for a moment. What might the impact be of banning all payments from product manufacturers?
What if rebates, volume bonuses and a range of other payments masquerading under a range of different names all disappeared? It could radically reshape the economics of the advice business, that’s what. If a planning firm or dealer group can’t rely on rebates from product manufacturers – including platform providers – to support revenue and profit, what are they going to do?
Other recommendations have the potential to cause significant change, too, and among them is “that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL”. You might say, “So what? I always put my clients’ interests first”.
And it may be true. But that’s not actually the same thing as having a fiduciary duty written into the Corporations Act. Given that the Ripoll report could have far-reaching consequences, we decided to dedicate a good part of this edition of Professional Planner to examining just what they might be, and how financial planning firms might constructively respond.
How the Ripoll report could affect your business is covered, explicitly or indirectly, throughout this edition. You might not agree with every interpretation put forward or every response suggested, and until we see final recommendations from the Government, we won’t really know what changes may actually be coming, anyway.
But it’s always instructive to learn how others are thinking and acting right now. The Ripoll report is just the beginning, of course. The Cooper (superannuation) and Henry (tax) reviews have yet to be released. So the ball is now in the Government’s court. It’s to be hoped that it can look at each of these reviews as part of a greater whole, and then come up with a set of guidelines that achieve their aims of protecting consumers, improving confidence in the financial planning industry and eliminating the industry’s perceived conflicts of interest, but without strangling the industry in red tape.