Independent advice networks now have little control over their future and must hope the Australian Securities and Investments Commission (ASIC) can protect them from “discriminatory actions” against independents.
This is the view of Peter Johnston, executive director of the Association of Independently Owned Financial Planners (AIOFP), who claims advisers are being made scapegoats for a litany of ills within the industry.
“There seems little doubt that the minister and his political allies are trying to link the $29 billion of frozen or failed products since 2005 to the independent advice networks to justify their thinly veiled discriminatory actions against the independent sector,” he told Professional Planner Online.
“Over the past 30 years the advisers have always been politically blamed by the media for product failure purely because the client’s only recourse is against the adviser [for giving the advice]. They cannot pursue the many gatekeepers who flee for cover and are ultimately responsible for the failure.”
To highlight his point, Johnston asks if a butcher would intentionally sell rancid meat to his customers. The obvious answer is no, as customers would not return and the business would be finished.
Assuming there was no obvious odour or visual blemish of the meat, the butcher would then approach his supplier to ask some very serious questions.
“This is precisely the same position all advisers are in when product failure occurs but it seems some think advisers would purposely sell rancid products,” argues Johnston.
“We agree that product commissions should be banned, but just because a product paid a commission, does not mean the product would fail?
“Of course it does not. Over the past 30 years commissions have been a legal and acceptable mode of payment for all products.
PJC to expose gatekeepers
“The highly anticipated Parliamentary Joint Committee enquiry into the Trio fiasco is going to highlight a few home truths about the conduct and structure of our industry gatekeepers – regulators, research houses, custodians, auditors, trustees and directors.”
In this respect, Johnston claims advisers are often as much the victims of the process as those they advise.
“Advisers are in the same boat as their clients,” he says. “We rely upon other third parties to do their job efficiently and fairly, yet advisers ultimately have to make a decision. But we have no choice but to rely upon the information that is put in front of us from the gatekeepers.
“It is literally impossible for advisers who sit in their offices around the nation contending with the day-to-day duties of seeing clients, massive compliance expectations and operating a business to personally visit and inspect every detail of every product scattered around the nation and the world.
“That’s why we have the highly paid gatekeepers in position to take some responsibility for their actions. Having massive resources like the banks is no guarantee of avoiding product failure or compensation for clients – the market is littered with clients litigating against the banks for poor advice.”
Johnston concludes that independents now have no choice but to rely upon a fair-minded ASIC to make the right decisions on what really is conflicted remuneration and what’s in the best interests of the consumer.
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Pat, you are starting to sound like Stuart Washington, not a good look! The facts are Astarra/Trio/Absolute Alpha were the original sponsors off the FPA conference in 2005. 2 research houses approved them in 2006/7 and only then did they become sponsors of the AFA and ourselves. Because we stood up for our 7 members involved [who were also members of the AFA and FPA] and stood up to Washington who was claiming that ALL the money was gone which was incorrect, he and i fell out.In his indominable fashion he purposedly tried to smear me with his inuendo and cleverly worded articles because i told him what i thought of him. The facts are i knew Shawn Richard like i know all our sponsors key people.The fiasco will be exposed shortly as a massive failure of the gate keepers whilst everything on the surface looked in order. We can all look clever with the power of hindsight. The AIOFP now only use MERCER and McGregor has its source of research for all product manufacturers and JB WERE/MSSB for ASX to be approved to speak at conferences. Like you, we are highly critical of Research Houses who accept payments from product manufacturers to get rated. If you want to continue this exchange my email is pjohnston@aiofp.net.au, i think enough dirty linen as been regurgitated!
Pat, you are missing the whole point, which industry fund are you with? Commission has nothing to do with past product failure. Many of these products should not have been on the market in the first place, slack gate keepers with an all care and no responsibility approach are to blame. Advisers are also victims like consumers. Just wait for the PJC report on Trio, you may take the blinkers off and desist with the political rhetoric.
Peter, I am in the profession of giving unconflicted advice to my clients, in whose best interests I operate. My eyes are clearly open to the products we recommend and why. We don’t fall back on 3rd party research houses who are arguably paid to provide positive reports. That the production of fund research has been arguably conflicted should be nothing new to you.
My knowledge of history may be flawed (and I will accept this), but let’s look at product failures and their correlation to commissions:
1. Timber/agri products
2. Trio
3. Westpoint, etc. debentures
You say that many of these products should not have been on the market in the first place. As I understand it, the Trio impaired funds where the hedge funds. Did your members who recommended these funds have a clear understanding of how these funds operated or did they rely on positive fund manage research? Given hedge funds generally are so obscure, the risk of fraud increases dramatically. Now, given this, would the members and others who recommended these funds have done so if they weren’t paid to do so?
You have done nothing to convince me that there is no correlation between inducements to sell a product and the likelihood that the product will fail for whatever reason.
I have no political rhetoric mate. I have been doing the pure version of FOFA (in fact, more like APES230) well before the acronyms were even thought of.
Peter can you name one failed product that didn’t pay commissions? To say that commissions had nothing to do with it surprises me. I know of an office that was thinking about joining the AIOFP, reckon I can quickly convince them not to after seeing this comment. Any investment that has to offer someone an incentive (commission) to recommend it, has something wrong with it from the word go.
Personally i do not use products or managed fund. For me, life is so much easier without them. Managing a portfolio of direct investments (shares , AREITs ect) does away with all of this discussion around product failures, payments here, payments there, who is licensed by whom ect There is no incentive to do anything other than what is in the best interest of the client
As an adviser you are going to take the kick up the back side if things go wrong regardless. I could not handle taking the kick for something someone else has done that was outside of my control.
As for the point of this article, what happened to people taking responsibility for their own actions? I dont know who is at fault here (contributory perhaps??) but there seems to be such a desire in society to put your hand up to claim involvement for the good things but it is always someone else’s fault when it comes to the bad things. I can definitely see a motive for this as it allows everyone to walk away feeling warm and fuzzy on the belief they did not do anything wrong but the reality is unless those involved swallow their pride and hold themselves accountable for their role (at whatever degree that was), things will never improve. And isnt improving the whole point?!!
As a research opinion writer, our end product is to be used as one of several sources an advisor has at his/her disposal for the management of their clients assets. It is the advisors duty at the end of the day to 1. know their client and 2. know their investment. If they do not understand the investment they are making they should avoid using it.
Can someone please quantify – research houses as overpaid or grossly overpaid?
To remove paid research is an imbecile notion advanced by people who are conflicted themselves.
Instead, let the market determine which research opinion writer is providing quality research and let the market determine what a bank, an advisor group, superfund, etc will pay for it..
Along the lines of the article, a research provider is in business to give his client the best advice or no-one will buy his/her rancid meat.
An adviser cannot step aside from their responsibility to their client by relying on 3rd party research, particularly when that adviser receives remuneration, such as commissions, “marketing payments”, etc. from that product provider.
Furthermore, do not confuse independent advice with independently owned advice. If you still receive such payments from product providers and are otherwise intermingled with such providers, you are not independent, irrespective of your ownership structure.
Until Johnston and his ilk can declare that they receive no payments by product providers for the sale of products, including percentage fees that conflict that adviser, they cannot call themselves independent.
We need to stop this confusing charade that only disservices the clients.
Pat, I do not understand your logic. You have made a distinction between independently owned advice and independent advice based upon an ASIC definition. Does this mean that by way of example an MLC planner who is 100% fee for service (not asset based if that makes you even happier) but only sells (uses) MLC product independent? Clearly not.
In addition, I don’t believe Peter is suggesting that advisers side step their responsibilities in the context of what their job actually entails. Please keep in mind that there is such a thing as investment risk.
Neil, I am sorry, but you have taken the approach of assuming that what is not white must be black. A planner who is tied to selling their owner’s product but may do so on a completely fee for service basis is not independent. I never even implied this to be the case – that you inferred this is your fault.
What I don’t understand is that the AIOFP reportedly worked very closely with key members of Trio, member firms of AIOFP allegedly received payments from Trio/Astarra, but, if this is the case, Johnston says it isn’t the adviser’s fault for recommending the fund that ultimately failed? If the AIOFP couldn’t understand the fraud that was going on inside Trio, why would the researchers?
Pat, the 7 members of our 150 practice members who offerred Trio/Astarra where also members of the FPA and AFA. Instead of running,hiding and pointing the finger we actually tried to help our members in their hour of need.[unlike others to my left]. Trio paid research houses over $60k to produce a positive rating, they should have picked up the problems, amongst other gate keeper failings. Suggest you reserve your comments until the PJC report is released or look on the back page of yesterday’s AFR.
How on Earth did you come up with that Neil? Where did Pat say an independent adviser can be aligned to a product provider?
Well said Pat. Agree with you 100%.
Fully agree with Peter Johnston, the adviser has been made easy target by all and it is about time all advisers made this point with government. Fund managers and researche houses who are grossly over paid for what they do cannot hide behind disclaimers. I wonder if IMF would beprepared to take a class action against the research houses for a lack of a duty of care when providing research as qhickly as some other law firms jumped on the band wagon aganst advisers? Let me know if the lawyers are prepared to do this and I will be at the top of the list.