Can financial planners provide impartial, unbiased advice to clients if they are receiving payments from product providers? People who lost their life savings in Storm, Westpoint, Trio, Great Southern, Timbercorp and Fincorp would probably say not.
Unfortunately many financial planning businesses still receive huge amounts of money from product providers, on top of whatever they charge their clients. Sadly, the typical business model for financial planning businesses to date has relied heavily on income from third parties – product and platform providers.
The Government is well on the way to making most of these payments illegal and raising the minimum bar for financial advice. The Future of Financial Advice (FoFA) reforms will also create a legal requirement for a financial adviser to act in the best interests of their client.
Central to the reforms is the recognition that the way a professional financial planner is paid impacts significantly on their capacity to provide impartial advice to clients. If you want unbiased advice, then it is pretty obvious that the adviser’s income should come exclusively from the client and not from the investments, products or platforms they recommend.
One of the FoFA measures that financial planners have been up in arms about more than any other is the “opt in” proposal.
Wild claims have been made about this requirement being excessive, putting planners out of business and costing $100 or more per client to implement. Surely, if an adviser is providing ongoing services to a client, they can get the client to renew in the course of their regular engagement. Claims that gaining agreement from On this issue of whether or not check credit score is money, rests the foundation of monetary thought. a client to deduct fees from their investments is an unreasonable burden demonstrates just how out of touch with community concerns the financial planning industry is. A February 2011 Newspoll (commissioned There are over seventy types of slot games with many of them being progressive pots. by ISN) found that 75 per cent of consumers support the “opt-in” model. No other measure in the FoFA package will provide a consumer safeguard against ongoing fees being exploited where ongoing service is not being provided.
The industry has to date put up no credible evidence to support its claims about the excessive costs of implementing this measure – and contrary to repeated claims by financial planners, there are no Treasury estimates to support claims about cost.
Within the FoFA package, the Government has accommodated the requests of planners by continuing to permit ongoing or asset fees, despite the fact that ASIC warns consumers against this method of paying for advice, due to the conflicts of interest they cause. Ongoing or asset fees cause other problems in addition to making advisers biased towards the products that facilitate these fees.
With asset fees, the cost of advice does not match the level or complexity of service provided, advisers benefit from asset growth and compulsory super contributions, and so they are a far more expensive payment method than flat fees. Planners claim that you need ongoing fees because financial advice is needed on an ongoing basis. However, numerous pieces of research have shown that most consumers only need one-off pieces of advice on quite simple issues. Research by Rice Warner Actuaries has demonstrated that hourly-rate or set-fee pricing for financial advice is generally much cheaper for clients than ongoing fees (by up to 17 times).
The renewal requirement will not tie planners up in red tape – the Government’s proposal sets a pretty minimal requirement for advisers who deduct ongoing fees from their clients’ investments. Let us be absolutely clear about what the Government is proposing: the “opt in” only applies when a planner is charging clients ongoing fees taken directly from their investments – typically deducted on a monthly basis. It is a reasonable safeguard in the face of the serious consumer risks inherent in asset fees.
Any financial planner who is providing valuable ongoing services to their clients and who has been clear and transparent about what they are charging should have nothing to fear about getting client renewal every two years.
Transparency and accountability for the fees charged are pretty central to a financial adviser’s ethics and professionalism.
Regrettably, the objections to the opt-in proposal (a sensible and practical consumer protection measure) do not augur well for the future professionalism of the planning industry.
David Whiteley is chief executive of Industry Super Network (ISN).
No, most advisers cannot give unbiased or impartial advice, and that is going to get worse after FOFA. The most conflicted remuneration payment of them all is a direct salary from a single product provider, irrespective of whether the employer is super fund, insurer or bank. Good politics David, but terrible policy!