There’s an old myth about the man who can’t get to sleep because the person in the flat upstairs has taken only one shoe off – he’s waiting for the other shoe to drop.

That’s where we are now with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

We are still recovering from two weeks of searing investigations into the worst parts of the financial advisory industry, streamed live and uncensored onto our screens from April 16 to 27.

And now we are going to have to wait for commissioner Kenneth Hayne’s report, which will be months away at the very earliest. His preliminary report is still nominally due in September and the final one by February 1 next year, although Treasurer Scott Morrison will probably give him an extension, particularly in light of the gravity of the revelations so far.

It’s the second report that will contain his all-important recommendations. If history is any guide, the government would be well advised to adopt as many of them as possible, as soon as possible.

Even veteran advisers winced as the details came tumbling out from the witness box, featuring everything from charging orphan clients for non-existent advice (thanks AMP) to charging estates of the deceased for same (thanks, Commonwealth Bank). Westpac came in for a thorough towelling over the adviser who told the Scottish nurse she could borrow $2 million to buy a bed and breakfast, an amount subsequently dialled down to $200,000 once it emerged – as most of us would have known – that it couldn’t go into her SMSF.

By then, she and her husband had already sold their house and they’re now renting, with little expectation of ever getting back into a house of their own as retirement looms.

But if all that looked bad for advisers involved in the vertically integrated advice model, and it certainly did, there wasn’t much relief for followers of the independent model either.

Tintin’s troubles

Self-created media guru and adviser principal Sam Henderson, who until recently bore a startling resemblance to Tintin and now looks more like the Ghost of Christmas Past, was hung out to dry when it emerged that he didn’t have a master’s degree in commerce at all, as he had claimed in his financial services guide, and it got worse from there.

Most particularly, he tried his standard schtick of pushing potential client Donna McKenna into an SMSF when she expressly said she didn’t want to go there.

Henderson admitted he had given totally wrong advice to McKenna, a fair work commissioner, in 2016, having in his haste confused her deferred benefit super scheme with a defined benefit scheme.

Of all the people he might have been tempted to snow, McKenna was the last he should have chosen. She asked questions and took notes.

In 2017, McKenna complained about Henderson and his conduct to the Financial Planning Association of Australia but it has taken a year and the issue is still not resolved. In response to the complaint Henderson told the FPA that McKenna was “aggressive” and “nitpicking”.

The most aggressive thing we know she did was to call his advice “risible” and throw the Statement of Advice document in the bin.

The commission subsequently raised a big question over whether either the FPA or its fellow organisation, the Association of Financial Advisers should be in the business of policing members anyway, given that they are also actively touting for members.

Faint of heart

Even more memorably for the so-called independents was the appearance of Dover Financial Advisers founder Terry McMaster, who is clearly a lawyer.

He had put in place a “client protection policy” that clients had to sign, which turned out to be trying to indemnify Dover against future claims by angry clients.

Once he admitted it was a poor choice of title, he fainted, then recovered enough as he was carted off to the ambulance to sit up on the stretcher. It might, in retrospect, have been better for him if he had stayed supine.

What shook other advisers was that they discovered his network was one of the biggest “independents”, with more than 400 advisers, a huge number, and if you go to Dover’s website, it doesn’t try to sell you advice, it tries to hire you.

Those advisers are understood to be mainly contractors, which raises the question of how they get paid. The website says it costs them only $20,000 a year to join.

It is scary to realise there’s no perfect advisory model out there unless we entirely replace trailing commissions with fee-for-service, systematically demolish the vertically integrated model and at the same time hugely reinforce the oversight of advisory businesses and of advisers who claim to be independent.

Adopting fee-for-service requires clearing the big psychological hurdle of the adviser having to be paid up front, rather than out of future cash flow.

As we look back over the financial advice hearings, we’re in a situation now where Hayne must be wondering where to start, nevermind go, with his eventual recommendations.

And they represent only a small part of the ground he has to cover. Of the 4501 submissions the commission has received so far, it notes that only 10 per cent of them relate to financial advice, compared with 65 per cent about banking and 9 per cent around superannuation.

Grandfathered trailing commissions

One rumble around the financial advice market is that grandfathering will come in for criticism by Hayne. When the Future of Financial Advice legislation came into law in July 2013, all previous advisory work was grandfathered, in terms of commissions payable to the adviser.

The logic was that, quite quickly, advisers would move to fee-for-service and the old advisory trailing commissions would dry up. That has not happened.

As Anthony ‘Jack’ Regan, whom AMP parachuted in to try to sort out the mess caused by clients being charged for non-existent advice, conceded to counsel assisting Mark Hodge, “It remains the case that the majority of revenue that is being paid to financial planners within the AMP network is derived from grandfathered commissions.”

He later noted that about 60 per cent of AMP’s advisory income is grandfathered.

And that’s five years later.

The advisers have no incentive to change and indeed it’s been suggested that the longer they leave commission-paying arrangements in place, rather than instituting commission-free strategies, the more their clients are going to be left behind in low-return products as they save for retirement.

Taking a helicopter view of other likely recommendations, it’s interesting to realise that the vertically integrated model may be dismantled by the free market almost faster than Hayne may recommend its demise.

During the hearings, we read in Professional Planner that NAB is looking to split off from Godfrey Pembroke, and that’s just one example. There’s not even much future in the aligned model whereby separately owned businesses hide under the parent bank’s wing.

As MLC chief Andrew Hagger put it, in giving evidence about working with aligned advisers, “The risk/reward equation looks different today to what it looked like in pre-FoFA days.”

You can assume that negative “get me out of here” attitude pervades the big institutions.

Whither the regulator?

Lastly, what about regulator ASIC?

As already stated, it will have to muscle up if there is any scattering of advisers away from the big houses, as is likely.

Senior ASIC executive Louise Macaulay made it clear in evidence that even with 60 people in her department, overlooking retail advisers, she believed ASIC was under-resourced.

The other strong rumble from the industry is that ASIC not only needs the manpower, it needs the willpower, too.

As one adviser put it, “They’ve already got a lot of powers but what they have to do is really start to use them.”

“You will be amazed,” the adviser said, “how quickly the miscreants will pull themselves into line once they see crooked advisers going to jail.”

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