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.
Being a pure fee firm, with clients in Mass, HNW and UHNW markets, we have a strong stance on percentage fees. However, I don’t agree with legislating or issuing regulatory “directives” in this regard.
Regardless, the problem is not going away. Advice to the mass market is becoming a commodity and flat fees, or at the very least capped fees will will become the norm and should be.
However, I challenge any notion that that those with more Assets/Income/Net Worth should not be paying a higher fee than those with less. Generally, more assets means greater complexity and/or more risk in the advice process, certainly in the HNW-UHNW market.
The challenge is to develop a clear proposition, price effectively and deliver efficently.
So Dave, if through no fault of my own but due to a gfc or product failure both clients lose all of their money. Do you think the guy with $400k will just sue me and my dealer group for the same amount as the $300k client? It’s called pricing in risk. Why should we regulate for the few cowboys who might transfer that term deposit – surely we let professional ethics deal with that.
Ross, to take your argument to its logical conclusion, do you charge clients a sliding fee based on their risk profile?
Do you make more if you recommend really risky stuff compared to conservative assets?
If so, how do you deal with the problem of there now being a conflict where you’re incentivised to jack up their riskiness of client portfolios?
And what do you say to the professional indemnity insurers who offer better premiums to advisers who swear off conflicts of interest (those PI insurers consider us less risky than the others). How do you take that into account when pricing risk?
THIS IS POSSIBLY THE MOST DISAPPOINTING AND DISTURBING ARTICLE ON THIS TOPIC I HAVE READ.WHAT HOPE IS THERE OF A BALANCED DEBATE WHEN THE REGULATOR HAS ENTERED THE DEBATE WITH PRECONCIEVED IDEAS AND MAKES SWEEPING GENERALISATIONS OF THE INDUSTRY.IT IS THE CLIENT WHO MUST HAVE THE CHOICE HOW THEY PAY NOT THE REGULATOR.COMMENTS LIKE THESE REALLY CONCERN ME,AS THEY WILL EVENTUALLY HARM THE VERY PEOPLE THEY ARE INTENDED TO HELP I.E.THE CLIENT.IT COULD BE ARGUED,THE REGULATOR HAS A CONFLICT OF INTEREST!
“THE REGULATOR HAS A CONFLICT OF INTEREST!”
Indeed. It makes their job much easier and supports their goals if there are fewer advisers doing the wrong thing!
Perhaps you could suggest how ASIC could get around that. How would you structure ASIC so that they no longer cared whether or not advisers did the right thing by their clients, so they could schlep along getting funding regardless of their performance with respect to that issue? ;)
Never in my life have a read such dribble. Let me get this right. ASIC are saying that a client will get a better deal (less conflicted) if they get advice from say a planner who is also employed by a product manufacturer who operates on a fee for service model as opposed to say a planner who is independently owned but operates on a service fee basis (based on FUM). What rubbish. The really scary thing is that this is being propogated by a government department! Never mind that this impinges upon normal commercial practices. Good grief. Oh and by the way, I would like to opt out of paying my local pharmicist the government guaranteed commission they get paid every time I by a precgiption for my kids. Wake up guys this is rubbish.
Neil, I agree with the Medication comment, why cannot a service provider decide to price relative to the client? I think I have the right to offer a “hard-done-by” client a lower cost if as a professional I see it as serving a purpose and benefiting that client. How do I “Opt-out” of Government/Pharmaceutical commissions?
Thanks Ryan, that ones easy. Latch onto a powerful body (like say, the industry funds or similar) and get them to to knock some heads around in Canberra.
“Let me get this right.”
No, you didn’t get it right.
ASIC said nothing about the merits of unaligned vs aligned here. They have made that comment elsewhere.
This article was confined to the issue of noting that percentage of asset fees introduce a conflict of interest whereas flat fees do not.
I am not saying that all %FUM advisers give bad advice which is against their client’s interests. I am saying however that all %FUM advisers have a strong financial incentive to give bad advice which is against their client’s interests.
The wind is blowing in a direction now where it is becoming unacceptable for advisers to have conflicts of interest. ASIC has decided that getting rid of bad incentives will ultimately do more good than requiring advisers to warn their clients about their bad incentives.
Getting rid of conflicts of interest is the only sustainable long term solution to the problem of conflicts of interest. We’ve had decades of issuing long documents warning clients that we might be a dodgy bunch because we have an incentive to act against clients and it’s never really worked. Some percentage, regrettably not a particularly small one, will do what they’re incentivised to do, which is why the profession has lurched from one conflict-driven scandal to the next.
I don’t think I’ll get any contradiction here if I assert that percentage based fee structures provide incentives against debt repayment, that they tend to drive money into products controlled by the adviser and away from alternatives like industry funds, ETFs and the like.
Your opinion on debt repayment, industry funds and ETFs etc is another issue… an issue best discussed in an honest environment where certain parties are not biased toward one option over the other for their own financial reasons, rather than the merits of the investment option!
Travis, I think you might have high blood pressure. Nowhere have I mentioned debt repayment, industry funds or ETF’s.
VERY interesting though that you raise the issue of industry funds. Very interesting indeed.
My blood pressure is fine thanks.
My point was that ASIC is gunning for conflicts of interest. Warning people about one conflict of interest is not the same as saying that another conflict of interest is ok.
Re-read my penultimate paragraph, I introduced those things myself… as examples of where %FUM advisers have a serious conflict of interest problem.
Those are all valid strategies to consider (debt, industry super, ETFs etc), but only a person who isn’t blatantly biased against them is really going to be able to fairly debate their merits, or at least be regarded as credible while doing so.
Why is it so interesting to you that I mentioned industry funds? I use them sometimes, I use wraps at other times. Which one I use depends on the client’s requirements. That’s how it ought to be, and would always be if there weren’t so many biased advisers out there whose financial incentives push them toward selling against them, rather than honestly appraising their advantages.
No, in case you’re thinking it, I’m not a member of any dealer groups affiliated with industry funds in ANY way. I have my own AFSL, we do our own recommended product list based on in-house research, and there are industry funds on that list alongside a number of wraps.
I would challenge any % based adviser to justify, explain, articulate, etc how the % they use is determined and appropriate for a given client. Sure, it might work for the business as a whole, sure any adviser worth anything could ‘sell’ the concept to a client, but how does the chosen % specifically relate to the work done and the value added to an individual client.
Tell me how 2 clients, one with $400k the other with $300k, but otherwise no difference (exact same portfolios, same advice needs, same everything) pay the same %, meaning the client with $400k pays more, even though their service, advice, etc is no different? How is this fair and reasonable? It might make sense for your business overall, and for you, but does iut really make sense for each individual client? How can they ever really trust that your suggestion to add the $200k they have in a term deposit to their portfolio is in their best interest, not yours?
Well done ASIC.
Dave, I doubt you are a financial planner so I will give you the benefit of the doubt. One major difference in the example you have given (although there are more) is that the 400k client poses more risk for the planner. You know, the risk of a client going to FOS about performance etc? This alone would justify a higher fee.
I am a financial planner, and I’ve been a very strong advocate of the flat fee model for nearly a decade.
The questioner’s point was valid. It’s an odd sort of calculus that operates where somehow despite the great difference in complexity between clients, portfolio size, estate planning needs, life stage, risk profile etc all somehow manages to neatly line up with the size of their portfolio.
What this is really about is that ASIC has finally started to acknowledge that having a biased financial advice profession is a bad thing, and rather than continuing to push the failed idea that mandating that advisers disclose their conflicts of interest will enable an educated population to make informed decisions, they realise that many people just don’t understand disclosure and/or aren’t aware that unbiased advice is even an option. ASIC now believe that in the long term the best way to manage the problems caused by conflicts of interest is to get rid of conflicts of interest.
As long as there are financial incentives to do the wrong thing, advisers are likely to do the wrong thing. ASIC could continue with the previous policy of requiring advisers to inform their clients via complex disclosure documents that they have incentives to act in a way which is not necessarily in their client’s best interest, or they can try something else… target the conflicts directly so the advisers are NOT incentivised to act in a way which is against their client’s interest.
That the latter is the superior long term solution was so obvious to me that, after my one year working with a sales-oriented dealer group, I have spent the subsequent nine years as a completely conflict-free independent adviser.
(Yes, I have my own AFSL, I charge flat fees, my approved product list is untainted by any kind of conflict of interest, my business is just fine, thanks for your concern.)
If risk to the planner was a major input to the fee calculation, you’d most likely charge a higher percentage to “Growth” clients instead of “Conservative”. Good luck selling to clients on the basis that your incentive scheme now results in you being paid more for putting clients into risky portfolios!
Thanks for your rather lenghthy reply Travis. But let’s get a few things out of the way first.
1. When did I say that risk was a MAJOR input into the fee calculation. I said it was A factor.
2.You make the assertion that asset based fees are an incentive for planners to do the wrong thing. This is simply not true.
3.When did ASIC formally drop ‘their previous plicy’ and adopt this as formal policy?
4. Your last paragraph is non-sensical.
5.Since you mention calculus – exactly how do you determine what fee your clients will pay. I assume, given your last paragraph that you extract risk completly out of the equation.
6. Why pay an asset based fee for anything. Given your argument, anyone charging an asset base fee is doing the wrong thing.
What rubbish.
Ummm, Neil, to quote your earlier reply:
“One major difference in the example you have given…”
Might want read what you already wrote, mate.
I agree that ASIC is setting policy instead of regulating it, and should probably reassess its position on these comments.
In our practice we mostly run flat fee-for-service. I have seen %-based fees presented in a socialist fashion: the rich compensate for the poor. For many lower income/asset families, they may not be able to access comprehensive advice without this “subsidy”. It is arguable whether that is “fair”, and why should a richer client pay slightly more to compensate for a poorer client who cannot afford it? Is this a societal problem as a whole? Does it apply elsewhere? Why should lower income earners get taxed less and pay less for medication? Surely there are parallels in the pricing models for services?
So Asic, let me get this straight, Fund managers and Banks/Lenders are able to charge assets based fees but because we are political easy-beats you can now bully us on line. This is the organisation that ignored warnings about Storm for a decade or more, who ignored warnings about Wattle for 3 years and many other warnings Advisers have referred to them. I am especially sick of being treated with a total Lack of Respect by Government, ASIC, Fee Greenies and The Industry Super Funds (the feeling is mutual).
There will definitely be a divide in the industry. All the folk that have low funds under management balances will be forced into cheaper options for advice. They are the loosers. At the top end, complex specialist advise will become more expensive. The shakeup will also mean less planners entering the industry. Maybe the accountants who are used to fee for service will step in. Let’s see. ASIC have swept in every commission fee permutation into their review which in the end hasn’t helped. At my practice, unless I earn $xx,xxx or more per year per client, I will not take them on.
What right does the regulator have to be advising consumers on how they should remunerate their adviser. This is a commercial arrangement between the adviser and the client and providing this is fully disclosed and agreed to by the client then that is up to them as they are paying the fee directly from their account.
Does this mean that ASIC will start to tell public companies how they will price their goods to consumers. Once again ASIC has jumped the fence and gone feral and is trying to set policy rather then regulate it. This should be withdrawn from this labor government established website.