I may be missing the point here – which would not be the first time – but weren’t commissions banned from financial planning in a bid to eliminate some of the more egregious conflicts of interest that arise when advisers are paid for selling products instead of for giving advice?
I thought so. And that is why Morgan Stanley’s recently reported – by The Australian – revamp of its advisers’ remuneration seems so startling. Well, it’s startling if it’s being carried out as reported, which I suppose is a fairly big “if”. The article states that Morgan Stanley’s is “a bold move to ‘lead’ the retail stockbroking and advice industry towards lower adviser commissions”, apparently overlooking the fact that “adviser commissions” have disappeared altogether in other areas.
(It was an interesting day – elsewhere in the same newspaper there appeared a report about a US-based wealth manager buying a Melbourne-based financial planning business as part of a strategy to purchase “unbiased, high quality unconflicted advice firms”. The report said this was a strategy that had “helped grow the [acquiring] company’s assets under management to more than $100 billion”. But in a “high quality, unconflicted, unbiased advice model”, who cares what AUM is? Unless, of course, your revenue is generated from AUM, in which case you are neither unconflicted nor unbiased.)
Morgan Stanley advisers are paid according to how much revenue they generate for the firm, and they reportedly used to receive 40 per cent of the first $500,000. Now they’ll only get 30 per cent – a $50,000 drop. What do you think is likely to happen? That’s right – its advisers will flog more product, because that’s how they generate revenue and who wants to earn $50,000 less?
Sending the industry broke
According to reports, “those [advisers] bringing in clients with more than $1.5 million to invest will be unaffected and still receive 52 per cent, which Morgan Stanley hopes will motivate advisers”. Too right it will motivate them. That’s precisely why commission has been banned for financial planners (and why asset-based fees should go the same way).
Based on this report, it seems the reforms that have swept through financial planning have somehow bypassed the stockbroking community. Remuneration based on product sales has been out of financial planning for some time now, but it seems to be alive and well in stockbroking. And what’s more, it’s sending the industry broke. That’s why Morgan Stanley is biting the bullet and cutting its advisers’ pay (it may not so much be biting the bullet as trying to catch it in its teeth after someone has already loaded the gun and pulled the trigger). But unless and until it de-couples remuneration from sales, conflicts will remain, and cutting advisers’ pay can only encourage them to sell more.
Some years ago Professional Planner ran an event aimed at the segment of the wealth management industry that likes to call itself “private banking”. We modelled the event on the successful Dealer Group Summit, and we attempted to put in front of the audience some issues that related to conflicts of interest, remuneration, separation of product from advice (which even has its own acronym now: SoPA), and so on. It was an eye-opener for us as much as it was for them.
Relatively few people in the audience actually get or engage with the issues up for discussion – there were some notable exceptions, including Paul Heath who, it is worth noting, now runs the boutique financial planning business Koda Capital with former MLC boss and NAB wealth executive Steve Tucker.
When the only tool is a hammer, every problem is a nail
To this day I believe they simply didn’t know or want to know what we were talking about. And it was an eye-opener for us because it quickly became apparent how much further down the track financial planning was than private banking, even then, when it came to recognising and eliminating conflicts, putting clients’ interests first and focusing on advice as the valuable bit. We didn’t run the event again – perhaps too many delegates were frightened off the first time around.
Judging from the issues outlined in reports of the Morgan Stanley remuneration revamp, nothing much has changed. There’s a saying that when the only tool you have is a hammer then suddenly every problem looks like a nail, and when the someone says “people are going to search out quality advice, but they need holistic multi-asset, multi-currency advice, not just based on domestic equities,” it seems that pockets of the wealth management industry still have not fully grasped the concept of “holistic advice”.
The irony is strong. This is a sector of the wealth management industry that believes it caters to the top-end of the market and to the most sophisticated clients in the country. It tends to look down on “financial planning”. Yet it remains mired in a structure and a mindset that the real financial planning community moved on from long ago.
