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News Bulletin : ADA News Bulletin April 2011
42 APRIL 2011 Compiled by Michael Lannon investment insight Financial Advice CAVEAT EMPTOR!! www.2020directinvest.com.au/ada | 1800 352 021 100% entry fee rebate on managed funds You have probably heard the old proverb “He who pays the piper calls the tune” which roughly means that the person who pays for any service has the right to say exactly what he wants. For a long time now there has been a great debate about exactly who is paying financial advisers and just who is calling the tune. The financial advisory industry has been referred to as being ‘structurally corrupt’ due to conflicts of interest created by the ways in which financial advisers are remunerated. I have always been an advocate of separating financial advice from product sales and empowering the consumer so they could truly call the tune. My mantra is: “Pay a professional hourly dollar based fee for investment advice and execute and control your own transactions.” The Global Financial Crisis (GFC) exposed flaws in many of the high fee products and services promoted by the financial services industry. High profile cases like Storm Financial, MFS and Westpoint were the catalyst that launched government inquiries into the financial advisory and superannuation industry. These inquiries produced recommendations that are the basis for the Future of Financial Advice Reforms that are currently being drafted into law. Hopefully, these reforms will address the issue of conflicts of interest in financial advice. Key changes proposed include: • No more new commissions from 1 July 2012 Commissions will be banned as will any other type of remuneration structure that creates a conflict of interest for the adviser. The proposed ban applies to retail investment products including managed investments, superannuation and margin loans. At this stage risk insurance products are excluded. • Advisers must put clients’ interest first from 1 July 2012 Whilst this might seem like a statement of the obvious, financial advisers will now be subject to a statutory fiduciary duty to act in the best interests of clients, which means advisers can no longer place their own interests ahead of a client’s interests. • Clients will have to opt-in annually to advice charges Rather than automatic payment of adviser fees until the clients chooses to opt out, the proposed reforms put the onus on the adviser to get client agreement to ongoing fees and charges on an annual basis. This will require advisers to actually provide the clients with some value for the fees charged as opposed to collecting fees based on the inertia of clients who simply do nothing or from clients who are unaware they are paying fees for advice they are not receiving. Personally, I believe that these reforms will go a long way to addressing some of conflicts of interest that exist in the industry. However, it remains to be seen whether the lobbying power of the major financial service providers (banks and insurance companies) will be successful in watering down these consumer protection issues. The Financial Services Council which represents the manufacturers is already attempting to change the ‘opt-in’ provisions by saying they impose too onerous a burden on the industry. With over 80% of financial planners owned by product manufacturers the fact remains that the vast majority of advisory groups are really a captive salesforce for their parent company’s products. Some companies attempt to cling to the pretence that their advisers are product neutral but the facts really do not support this position. Table 1, based on a 2009 study, illustrates that a serious product bias exists. TABLE 1: Financial advisers are mainly a salesforce Advice group Percentage of superannuation products obtained through financial planner also with the same manager AMP 82% ANZ/ING 47% AXA 75% CBA/CFS 74% NAB/MLC 68% Westpac/BT 73% Total Big 6 73% Source: Roy Morgan Research, Superannuation and Wealth Management in Australia, May 2010. Data period: January 2009 – December 2009, sample n = 1 ,350 work based or personal superannuation products obtained through six major planning groups.
ADA News Bulletin March 2011
ADA News Bulletin May 2011