This will be my final column for Professional Planner. Having contributed since the magazine’s inception, I have really said what I wanted to say in relation to the financial planning sector.
Many of you will be glad that is so and will be hoping for some respite from the criticism that has swept the industry in the past couple of years.
On the other hand, I think Professional Planner is to be congratulated for its foresight and boldness in directly tackling the issue of professionalism in financial advice by engaging directly with those who make their living in this way and engendering debate about remuneration models that go to the heart of the issue.
It now appears that at least part of the financial services industry is set to embrace change; and it seems highly probable that some change to the regulatory framework will occur, at least requiring advisers to have a fiduciary obligation to their clients and perhaps banning product providers from remunerating those who hold themselves out as licensed advisers.
In my opinion, a fully professional client/adviser relationship requires a flat fee for service, fully transparent to the client. It is true that this might, in the short term, reduce the number of clients, and therefore the number of licensed advisers; but only to the extent that costs which are currently hidden or not understood become transparent.
This gap will need to be filled by low-cost advice of a general nature, whether provided by superannuation funds or by various forms of wholesale and mass advice.
Also, to some extent, financial institutions will obviously rely more on sales forces than relationships with adviser/dealer networks, so that the independence of remaining advisory networks will tend to be increased, and their ability to objectively provide product selection advice will be enhanced.
Clearly, however, independence of ownership is absolutely no guarantee of financial independence from product providers. So long as advisers accept commissions in any form – up-front or trailing, soft-dollar or hard cash – there will continue to be scandals along the lines of Westpoint, Storm or Astarra and thousands of other inappropriate behaviours that do not make it to the public media or the courts.
All service providers in the financial services sector naturally love the concept of asset-based fees. Total superannuation assets grow steadily through new contributions and earnings and if client funds are at all “sticky”, a very valuable growing annuity business is quite quickly developed. And this is fine if it is completely transparent to the client, as one might expect if we are dealing with substantial, wholesale, “sophisticated” clients.
At the retail level, however, the reality all too often is that the client simply is not conscious of the real long-term cost to his or her savings of an ongoing percentage fee on a growing balance and therefore can make no effective judgement on the value of advice.
That is an inconvenient truth that the regulators must come to grips with in providing adequate consumer protection and fostering genuine competition around price and quality; and that the planning industry needs to come to grips with if it seeks the status of a profession.
Garry Weaven is chair of Industry Funds Management, an investment service provider to the superannuation industry; a director of Members Equity Bank, which is owned by 40 superannuation funds; and a director of Pacific Hydro.