The Future of Financial Advice (FoFA) reform number one states that there will be a prospective ban on all conflicted remuneration structures in relation to the distribution of, and advice on, retail investment products, including managed investments, superannuation and margin loans.
The FPA is entirely supportive of this and led the way in responding to consumer concerns. However, recent claims attempting to equate “asset-based fees” with “conflicted remuneration” shows a profound (or potentially deliberate) misunderstanding of the fact that “asset-based fees” are not a form of remuneration at all, but very simply a form of “calculating” remuneration. When coupled with the professional expectations that require client-directed payment and prohibit product or strategy bias that acts against a client’s interest, it is clear that this form of calculation does not create conflict at all.
It is worth noting that the Government is banning all conflicted remuneration models. The fact that they are not banning asset-based fee calculations (or hourly-based fee calculations or flat fee calculations) is acknowledgement that these are deemed to not be “conflicted remuneration” models.
The issue that should be debated is not which calculation model is better, but whether the remuneration in the financial planning profession is appropriate to professional expectations of practice, transparency and comparability – and more than anything else, aligned to professional expectations of a service that delivers value.
Members of the FPA are required to adhere to our remuneration policy, which stipulates the following six principles:
1. Clients must be able to understand the fees they are paying.
2. Clients must be able to compare the fees they are paying.
3. Clients must be presented with a fee structure that is true to label.
4. Clients must be presented with fees that are separated between advice and product .
5. Clients must agree the fee with their financial planner and can request that the fee is switched off if no ongoing advice is required.
6. Clients, rather than product providers, should pay for financial planning services, so as to remove potential for bias.
These principles provide the required safeguards for consumer protection without prescribing how a professional’s fees must be calculated.
Setting the right remuneration calculation needs to be considered in the context of both professional and legal obligations. The FPA’s professional expectations clearly require that, irrespective of the calculation method, fees (upfront or ongoing) can only be charged if a professional service is being provided. This is clearly spelt out in the agreement signed between a client and their financial planner and will be supported with a statutory best interest duty that will hopefully draw all non-FPA members into a similar expectation of rejecting strategy and product bias that works against the client’s interest.
The campaign to equate asset-based fees with commissions is clearly an attempt to muddy the waters given that commission is a form of payment from a product and asset-based fees a form of calculation for how the client will pay fees. One is transparent, client-negotiated, client-directed and client-controlled in being able to be turned off at any time. The other is not.
The frequently quoted example of a client being misdirected away from reducing their mortgage into an asset increasing investment completely disregards the professional (and soon legal) expectations of the FPA’s professional expectations and “client first” duty which require the financial planner to put the client’s interest ahead of their own, irrespective of the remuneration model that is used.
Rather than settling on a single model of remuneration calculation, members are offering a range of options to suit the needs of the client, the complexity of the advice and the unique circumstances of their service needs. This unique combination of needs for every client deserves a tailored approach to delivery and calculation (be it asset, hour or flat fee) and is something that each professional should be empowered to do with each client.
Dante De Gori is general manager, policy and government relations, for the Financial Planning Association (of Australia).
