Nestled in the first few paragraphs of the executive summary of the Retail Banking Remuneration Review, released on Wednesday, is the sentence: “New approaches to retail bank remuneration are by no means a panacea.” But reforms to remuneration could be a panacea, if only the industry had the courage to embrace them.
If there’s one single thing that could advance financial planning by leaps and bounds, it’s the elimination of conflicts of interest – of all sorts, at all levels and for all parties involved.
The most egregious of all conflicts generally are financial; businesses and organisations get the behaviour they reward. That’s what incentives, bonuses and other payments are for, and if they didn’t work they wouldn’t be paid.
The Retail Banking Remuneration Review, authored by Steven Sedgwick, states that 21 of its recommendations are deliberately intended to signal “a sharp break with the past for the banks and their remuneration practices”.
But the thing is, not all of a bank’s financial planners fall within the scope of those recommendations. Those who do – called “in-scope” financial advisers – are people who are “bank staff and who provide personal and general advice to retail and small business customers on Tier 2 products only”.
(Tier 2 products include: general insurance products, except for personal sickness and accident cover; consumer credit insurance; basic deposit products; non-cash payment products; and First Home Saver Account deposit accounts).
Need to go beyond FoFA
The report states its recommendations are “intended to build on the Future of Financial Advice (FoFA) reforms and identify options for strengthening the alignment of retail bank incentives, commissions and bonus payments (variable reward payments), practices and good customer outcomes”.
That all sounds good. Yet, the review also states “most financial advisers are subject to the FoFA rules in respect of product-based payments and product sales commissions and are therefore outside the scope of this review”.
That’s of cold comfort to consumers whose advisers have been paid to pump clients’ money into particular investment products, and continue to collect fees based on a percentage of a client’s funds.
FoFA is OK as far as it goes but it doesn’t go far enough and, as discussed here before, as long as asset-based fees continue to be allowable, there will continue to be conflicts right across the financial planning industry.
Asset-based fees must go
Asset-based fees strike at the fundamental question of what constitutes advice. Advice – any professional service – is sometimes said to be based on the four ‘E’s: education, examination, experience and ethics. The value of the service derives from those things, not from how much money a particular client happens to have at a given time.
And as long as asset-based fees exist, claims that financial planning is or can be a profession will continue to be undermined. The sooner the financial planning community learns to charge for advice, rather than for FUM, the sooner it will remove one of the key impediments to professionalism.
The reasons are simple and by now tedious: an asset-based fee means assets have to be accumulated somewhere to charge the fee on, which dictates a particular course of action (that is, to invest); and being paid only for taking a particular course of action presents a conflict for a financial planner when the best course of action for the client is to do something else.
Asset-based fees also betray a certain lack of professional self-respect. It’s embarrassing to claim to be an adviser but not be paid for advice (don’t be surprised if clients do not value the “advice” either). And it’s just as embarrassing when the market falls and the value of your professional expertise likewise falls.
A missed opportunity
In many ways, the limited scope of the Sedgwick report is a great pity. Like FoFA, it’s OK as far as it goes, but it would have been better if it went further.
If the reforms proposed for in-scope advisers applied more broadly, to all bank financial planners, who give personal financial advice on a wide range of financial products, structures and strategies, then it would have been an impressive step towards getting rid of exactly the incentives that have led to poor quality advice in the past, and which still hold the potential to lead to poor quality advice in the future (see: asset-based fees, above).
There’s nothing to stop a bank from imposing a remuneration structure and a set of behaviours that exceed the requirements of the law. That is, after all, what a profession does as a matter of course.
But out-of-scope bank advisers will continue to comply with FoFA and, indeed, with the lower standard.
The review states that remuneration reform may not be a panacea, but it also notes that an issues paper released in January this year “documented instances in retail banking and across the financial services sector more broadly, both in Australia and abroad, in which incentives have at the least appeared to drive behaviour that was not in the best interests of customers and, on occasion, scandalously so”.
It’s a shame the review was not given a broad enough remit to address those scandals.
The Retail Banking Remuneration Review recommendations include:
Note: In-scope financial advisers include only individuals who are bank staff and who provide personal and general advice to retail and small business customers on Tier 2 products only. |
