The corporate regulator, the Australian Securities and Investments Commission (ASIC), has launched a new website today, in which it suggests consumers should avoid paying asset-based fees for financial advice.
The new website, www.moneysmart.gov.au, includes a section on investing and financial advice. Under the heading “Choosing an adviser”, the website urges consumers to check the fees that they will pay for advice.
“Traditionally most advisers have also been paid commissions on financial products you buy,” it says.
“In the end this comes out of your pocket as your investment balance is reduced by the amount of the adviser’s fee. Often the adviser may earn more from a particular product, which may influence them to recommend something that is of greater benefit to them than it is to you.
“These potential biases are known as conflicts of interest. The Commonwealth Government has announced changes to the way advisers will be paid from 2012. It proposes phasing out commissions.
“In the interim you may be offered advice on a commission basis or on a fee-for-service basis. In our opinion, the fee-for-service model is generally a better way to pay for advice. It reduces the chance that the adviser’s recommendation will be biased. A ‘flat dollar’ fee, rather than a ‘percentage of assets’ fee, will give you more certainty and reduce conflicts of interest. It is better if the adviser does not have an incentive to recommend that you invest larger amounts of money.”
The website also provides guidance to consumers on determining whether they need advice in the first place, getting started with a financial adviser, and working with a financial adviser. It also includes links to the Financial Planning Association of Australia’s and CPA Australia’s “find an adviser” services.
ASIC has produced a consumer booklet, entitled Getting Advice.
Moneysmart.gov.au is part of the Government’s National Financial Literacy Strategy, also unveiled yesterday.
It seems that no one else is willing to acknowledge that the real issue is ‘conflicted advice’ being provided by ‘institutional product marketers’ who do not want to be properly diferentiated from unaligned ‘advisers’. Once this distincton has been made and the fees (initial and ongoing) agreed on this basis, the payment methodology is surely of no concern to anyone other than the adviser & client and thus becomes simply a matter of their mutual convenience.
Don’t tell me this blindingly obvious insight killed off the disucssion?!
Hi Chris. The pause in the discussion was my fault. I’ve been preoccupied getting the next edition of Professional Planner to the printer and forgot to check and moderate pending comments. Back on track now, though. So please continue.
Simon Hoyle
Editor
Professional Planner.
I’ve just started following this “debate”. Neil – If you’re proviiding advice or information to your local MP then he/she will be worse off after that… You just don’t seem able to follow this debate logically.
The rest of you may need to understand that advisers like Travis are not the enemy – they are the future while (most of) you represent the past… You will be like the dinosaurs if you don’t “get” that all your conflicts of interest (whether you understand them or not) simply preclude you from giving advice worth taking.
Our clients are owed a fiduciary duty by us, but most of you sound like those real estate agents you like to compare yourselves with…
I’ve been fee for service for over 20 years and I offer a menu of fee options from low, flat-dollar and low service (ideal for those wanting to DIY and just have mentoring) to full service % based (but with a steeply sliding scale so that extra risk (ie insurance costs) are taken into account but without placing an unnecessary burden on the larger client, who, it has been pointed out, is not 3 times as much work just because they might invest 3 times as much money.
My clients also have held 70% in cash over the past 5 years – yes 5 years (and more for quite a few) and NONE lost any money during any of those years, even during the GFC (which, by the way is only about halfway done yet…). Needless to say, my clients are grateful and happily pay my invoices every year 9in advance!) for sound, protective advice.
They pay us (well, me at least, I’m not quite sure what they pay most others for – nor are they) to be stweards of what they have created NOT to lose it for them. THEY create the wealth: we are privileged to be asked to help them keep it safe and gain a reasonable, but usually moderate return. Those advisers who think they are the wealth creators are actually delusional.
Like Travis, I’m doing very well (I have a waiting list for clients wanting to join me) and many of your clients are finding their way to people like us who put their clients interests first, second and third – and always well ahead of any self-interest.
I’m also not greedy. I find my fees tend to average less than others despite my far superior track record of investing and general advice, but I don’t claim to be the ultimate authority on the broad planning issues and find that many of you out there are much better than me at that. Those who are should charge for THAT advice and stop using investments (at which they are plainly hopeless) to subsidise the planning in your practices.
And if there is any blam eto be laid at ASIC’s feet it’s only because of the political push over the last decade to destroy ASIC’s authority.
Remember when we used to have a Dealers Licence or an Advisers Licence? The dealers were able to accept commission payment (after all, they were only dealers, not advisers) whereas Advisers were NOT able to accept commissions. The choice was clear – clients either had an expert adviser or visited a commission paid dealer (a bit like a car dealer as opposed to an expert who might help you select a car from across all the available options, for a fee). But Mr Howard and co got rid of that in what they laughably called “reform” and now we have one Financial Services Licence which does not distinguish between the experts and the commission agents.
That wasn’t ASIC’s fault – it was yours and mine, folks. We stood by and let it happen. Some of you will still be slack-jawed and saying “huh”, but those of us who understood tried to stop the rot, but were unheard against the din of the rest at the trough.
Finally – the public demonstrably does NOT trust a rabble that refuses to become a profession (with hourly fees and project fees/rates quoted in advance) and until very recently the peak industry body (FPA) actively worked against such a move to professionalism. Having been a founding board member of the (then) AIPA which formed the FPA, I quit as soon as it started to want to be sponsored (read “paid for and controlled by) the fundies. I quit then in disgust and have never been a member since (1989) and nor would I join any organisation whose members don’t understand, let alone wish to remove conflicts of interest.
The money business is a wonderful place to work. You get to keep your hands clean and play with other people’s money. You should be grateful and get down on your knees and kiss your clients’ feet. But instead you (the majority, including fund managers, advisers and the army of hangers on) tend to abuse the privilege. You’ll hate me saying it and don’t worry I have few friends in this business, by choice, but one day you’ll see the sense of the words, despite wanting to shoot the messenger!
Good luck.
There’s much confusion, given our industry is supposed to be advising the public. It’s quite simple. First we must differentiate ourselves as either ‘advisers’ or ‘institutional product marketers’. This neatly fixes the fundamental issue of ‘conflicted’ advice. The client then either says to us, “I know you are from XYZ insto and realise you are promoting your company’s products” (just like the public doesn’t expect a Holden employee to be promoting Fords) OR “I accept your recommended product advice”. With this vital issue out of the way, they then agree to pay a certain fee (upfront & annual, as reviewed), worked out on whatever basis and paid through whatever is the most convenient mechanism. Now, what’s wrong with this approach?
So ASIC by your reasoning the government should not charge more stamp duty on a house that is more expensive. The management fee on a super fund with $100 should be the same as a fund with one million dollars. There is no way this is going to fly ASIC.
You public servants must be stupid !!!!!!
John,
Their reasoning is that financial advisers are to be held to a high standard as fiduciaries. They expect us not to have conflicts of interest.
Therefore the comments from a number of people above wondering why similar rules should not apply to real estate agents, retailers, door to door Tupperware salesmen, the tax office or council rates etc are missing the point completely.
None of those other situations refer to fiduciaries with conflicts of interest. It’s a worry actually that so many advisers think the closest thing to a financial adviser is some kind of salesman.
I am eagerly awaiting ASIC to attack the realestate game with such vigour. They charge % fees, on most people’s biggest asset.
Go ASIC
Travis
We were a flat-fee based business. Sometimes flat fees can be expensive if you equate them to a percentage in certain circumstances. For example. if you have a client in the pension phase and their asset base is diminishing because they are taking out more than the invetsments are earning either due to insufficient asset base or market forces. You will find that flat fes then become expensive unless you diligently reduce your fees on aregular basis.
We have now moved to asset based fees – if we do well for our cleints we get rewarded. If we do poorly, then we get less revenue. We have no affiliation to managed fudns and deal in mostly direct investments and that includes term deposits.
I would be interesetd in your flat fee model where you invest your cleints money. If it is managed funds or a wrap account, then you argument is totally blown away.
“I would be interesetd in your flat fee model where you invest your cleints money. If it is managed funds or a wrap account, then you argument is totally blown away.”
I mostly use managed funds and wraps.
My argument is that by using flat fees I have no conflict of interest when I have to make decisions about gearing, debt reduction as an alternative to growth investments, there is nothing stopping me from using products like industry super if I want to.
What exactly about my argument has been blown away?
Well you can’t put everyone in the same basket for asset based fees. There are a number of advisers who have no conflict of interest and charge accordingly to what is in the best interests of the client. If you think an asset base fee is a conflict of interest then why are you using a wrap account anyway. That is the biggest conflict of interest in this industry.
I’m using a wrap because it gives me access to the funds I want, which aren’t available without wraps.
You seem a little confused by what a conflict of interest is. A conflict of interest is where you have to weigh up your interest against that of your client and make recommendations which may favour one or the other party.
When I quote a client a flat fee, I have no conflict of interest there. My financial situation will not be altered by the recommendations I make.
When you quote an asset based fee, you have to decide whether gearing is to be used. You have to weigh up mortgage vs salary sacrifice options.
In dozens of ways you have to make decisions where your recommendations will have a direct impact on how much money you make.
I am not suggesting that you necessarily are unable to resist temptation, but I don’t think even the most pro-asset based fee person here would be able to keep a straight face while claiming that NOBODY in this business can resist temptation.
The principle we’re discussing here is whether or not temptation-free remuneration systems are better because of their inherent incorruptibility than remuneration systems where there is temptation and where following that temptation could lead to very bad outcomes for clients.
I’m an honest guy, but even so I’ve made an ethical stance that in my business I am not going to have any conflicts of interest. Nowhere in my advice process is there ever any point where I have to make a decision where I need to weigh up the client’s interests against my own.
It is not only possible to do business that way, it is also profitable. In ten years it will almost certainly be the way the majority of advisers do business, and advisers will find it astonishing that a corrupt system had so many ardent defenders who thought the real problem facing the financial advice profession was that the regulator was targeting conflicts of interest.
Councils had better not have their rates having any thing to do with home values I suppose.
This issue is out of control. If a person with $40,000 comes into invest, we still have to do all the compliance work , and there is no way I am going to charge him what I would charge someone with a million dollars even if it’s cost me more to set the smaller investor up. ASIC wants me to charge them the same amount which means just not servicing the little bloke at all.
Due to a personal issue one of my good friends and clients just took about a million dollars out of his super leaving about $300,000 in it. Even though he was on a flat fee, I did of course reduce fees considerably. In a way he might as well have been on a %based fee because that’s virtually what happened. Perhaps advisers who want to charge a flat fee all the time want to protect themselves against falls in the market. Surely that could be viewed as a serious conflict of interest. Many clients prefer your fees to reduce in market weakness. It’s a personal choice. There is no right or wrong. Any one hopping on a high moral horse about this issue is in danger of falling of it that’s for sure.