Sometimes it’s hard to see the forest for the trees. The financial planning industry is facing a lot of change, it’s coming quickly, and it’s difficult to work out exactly what the outcome is likely to be.
Whenever there is rapid change – and sometimes even when the change is ostensibly quite simple and well intentioned – there is a very real chance of adverse unintended consequences. There will doubtless be unintended consequences from changes contained in the Government’s blueprint for an overhaul of financial advice. The Future of Financial Advice package is based on the findings of the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Financial Products and Services in Australia, chaired by Bernie Ripoll.
In addition to being much less of a mouthful, the Future of Financial Advice proposals, released on April 26, extend the PJC report’s recommendations in some areas – for example, ditching the so-called “accountants’ exemption” – and in other areas rejected its recommendations, including the establishment of a professional standards board. Overall, while the proposals have largely been welcomed, valid concerns have been raised about how much thought and consideration the Government has given to the package. But those concerns were allayed by the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, at a Professional Planner/Vanguard Investments roundtable on May 5. The roundtable provided an invaluable insight into the Government’s thinking.
Bowen freely acknowledged that there was, and continues to be, some uncertainty on how to proceed, in certain areas. But no one can say the consultation process has not been exhaustive: it was joked during the roundtable that over the past two years, Bowen has spent more time with industry figures than he has with his own family. What the industry can be confident of, however, is that Bowen understands the issues and is committed to finding workable solutions.
An appreciation of commercial reality will temper the more outlandish or impractical suggestions that may be thrown up from time to time. Even so, Bowen acknowledged that any significant reform package invariably has unintended consequences, to a greater or lesser degree. There are some areas – such as the issue of commissions on risk products – requiring further consultation, so that unintended consequences can be minimised. Bowen underlined the fact that there was no chance of an increase in the Superannuation Guarantee, from 9 per cent to 12 per cent (announced in the Government’s response to the Henry review of the tax system), unless and until it could be shown that the planning industry has cleaned up its act.
This is consistent with statements made by Bowen’s predecessor as the minister with responsibility for super, Senator Nick Sherry. So the phase-in of the Future of Financial Advice and SG proposals are not closely aligned by accident. It’s worth reiterating the two principles that guided Bowen in framing a response to the PJC inquiry. The first is that financial advice must be in the client’s best interests, and that distortions to remuneration which result in a misalignment of client and planner interests should be minimised. And secondly, any moves to minimise these distortions should be implemented so that financial advice is not priced out of the reach of consumers who would benefit from it.
There’s no one working in the industry who could reasonably argue with those objectives; there are plenty who, justifiably, question whether those objectives can be achieved, or whether they are, in fact mutually exclusive. Reforms to conflicted remunerations structures will, so the argument goes, inevitably lead to a rise in the cost of advice. Product providers have a role to play in helping meet the Government’s objectives. They will clearly be beneficiaries of the increase in the SG; the amount of money they will manage for Australians is set to balloon. So it is absolutely not unreasonable to expect a significant – and clearly articulated – cut in the cost of products.
If product manufacturers are no longer paying commissions to planners, then it is only right that the cost of those commission payments be cut, in their entirety, from the cost of products. The legislation effecting the Future of Financial Advice proposals has not yet been drafted. In fact, the process hasn’t even started. Bowen also has to deal with the Opposition and the minor parties to get these proposals into law. One thing the Government won’t stand for is industry self-interest.
Having commissioned the PJC report and then framed its response, it’s clearly not in the mood to have its objectives watered down or circumvented. In this context, it will be fascinating to see how the various industry bodies jostle and vie for prominence in putting forward the “industry” view. The incoming chief executive of the Financial Planning Association of Australia, Mark Rantall, is not going to have long to settle in before he’s pushed in at the deep end. Provided politics doesn’t get in the way, there’s a golden opportunity for the industry to get in on the ground floor and influence how the legislation is framed, with the aim of minimising the unintended consequences and ensuring the Government’s twin objectives can be achieved.