The Future of Financial Advice (FoFA) legislation banned conflicted remuneration, introduced tougher fee disclosure requirements and forced advisers to act in their clients’ best interests but it did not separate financial product and advice.
If the industry is to earn the trust of investors, it must separate financial product and advice.
Advice should not be moulded around a product sale, be that a super fund, model portfolio, wrap platform or insurance policy.
The only motivation for advice should be to help investors uncover their true needs and objectives; understand the different financial strategies they can implement to achieve their objectives; understand the different risks involved; and be empowered to make the right decisions.
Although implementing advice will most likely require product, it should never be predicated on product sales.
Five ways to expedite the divorce process
- Greater transparency from licensees
Dealer groups and Australian financial services licensees (AFSLs) should be forced to publicly disclose their revenue and profit, and the average cost of providing licensing services. In addition to client fees, they should be clear and upfront about non-client revenue sources like rebates, subsidies and allowances.
- Advisers must publicly declare all revenue sources, payments and institutional ties
Financial planners should be made to disclose any non-advice-related payments from a product provider.
While they must provide clients with details of any commissions and payments they receive by a product issuer in relation to advice in a statement of advice or record of advice, they don’t have to (and don’t) disclose if they received a payment to join an institutionally-owned licensee, or if their practice is part or fully-owned by a product provider.
If an institution has acquired an interest in a practice, as is increasingly common, advisers are not required to disclose the sale price or details of the arrangement, for example, if a higher price can be achieved by hitting specific sales targets within a set time period.
Arguably, clients have a right to know given these payments and deals have the potential to influence advice. In cases where advisers also own equity in their licensee, they should also disclose any dividends.
- Outlaw subsidies to licensees
In theory, FoFA’s ban on commissions makes it illegal for product manufacturers to cover or subsidise the cost of superannuation and investment advice.
Yet product manufacturers are able to prop up and subsidise their own third-party licensees without disclosure.
Often the client has no idea they are being sold advice and product from an adviser linked to an unprofitable licensee, which is being supported by an institution.
It should be illegal for product manufacturers to bank-roll licensees unless they are salaried sales agents operating under an institutional brand.
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- Make it illegal for product manufacturers to coerce advisers to sell related product
It should be illegal for product providers to pressure advisers to sell their products.
In other industries, coercion is regarded as criminal behaviour, however, it’s largely ignored in financial services, especially within the salaried networks.
Given Australia’s compulsory super system which forces people to save and invest for the long term, coercion is especially dangerous.
There must be clear and enforceable boundaries between advisers and product manufacturers to protect consumers and advisers.
- Lift the entry requirements to be a financial adviser and an AFSL
It should be much harder than it is to gain an Australian financial services licence. The licence is the primary protection mechanism for consumers. The licensee is liable for poor advice and rogue planners.
Yet many of the product failures that have occurred in the past decade have been distributed through small independently owned AFSLs run by people with limited compliance experience and little understanding of how investment products work and should be selected. Applying for, and gaining, a licence can cost as little as $6000. There must be tighter restrictions on who can be granted a licence and the must be closer monitoring of licensees.
The minimum education requirements for Australian financial services licence holders should also be lifted significantly.