Financial planners must turn their back on cheap dealer groups and start paying a fair price for licensing and compliance if they’re to earn the respect and credibility they desire, states an explosive new white paper written by leading industry experts.
The Sky is Falling, written by executive chairman of Fortnum Financial Advisers Ray Miles, principal of Strategic Consulting and Training Jim Stackpool, and managing director of Innova Asset Management Dan Miles – blames discounted dealer fees for the proliferation of limited approved-product lists, which in turn promote conflicts of interest in financial planning.
The paper cites research which shows it cost the average dealer group $49,000 per annum to license one adviser in 2011, and yet many dealers charge between $10,000 and $20,000. Some institutional dealers offer licensing for “virtually free”.
Institutions are able to do this because they can sell related investment, insurance and superannuation products through their underlying advisers, and ultimately cross-subsidise the dealer group.
“Given the majority of dealer groups don’t make a profit from the provision of dealer services such as licensing and compliance, the profit has traditionally come from commissions and platform rebates, and related-party product sales,” said Miles.
“Most advisers want to deal only with the clients who are prepared to pay a fair fee for their services, yet they do not afford their dealer the same courtesy.
“This explains almost all of the behaviour and conflicts in the industry. The institutions worked out fairly quickly that they could never charge advisers enough to make a profit out of the dealer group, and this lack of profit inevitably impacted on the products recommended.”
The paper draws a direct link between cheap dealer fees and the shift to slimmed-down approved-product lists, which are typically populated with inhouse products.
Advisers undervalue dealer groups
Generally speaking, advisers don’t understand the true value and importance of well funded, independently owned dealer groups, said Miles.
“The end result is that clients ultimately end up paying the dealer fee through inflated administration and investment costs,” he said.
The paper concludes that the new Future of Financial Advice reforms do nothing to stop institutions offsetting losses in their dealer group businesses with profits from product manufacturing.
It also urges financial planners to abandon event-based advice and traditional risk-profiling methods in favour of outcome-based advice, which involves developing a comprehension of a client’s long-term financial objectives followed by the delivery of a strategy that will best achieve these objectives, regardless of whether or not financial products are required.
“Rich outcomes-based advice is simply a deep and honest conversation about the client’s life, goals and objectives, and the likelihood of them being achieved. Many advisers currently do this but are then forced by compliance to put together a risk profile on the client to feed into a portfolio that has nothing to do with the client’s goals and objectives,” the paper states.
Click here to download The Sky is Falling.
