Financial planning has an image problem
Mike Taylor writes that the existence of large payments and the perception that a sales culture continues to exist in the financial planning space represents a dangerous recipe for the industry.
A constant undertone has attached to some recent financial planner bans, enforceable undertakings and legal action pursued by the Australian Securities and Investments Commission (ASIC): that the planners involved may have erred because they were seeking to meet commercial/sales targets imposed by their institutional masters.
It is now five years since the onset of the events which led to the global financial crisis (GFC) and it is nearly four years since the GFC reached its depth in terms of both the market as measured by the ASX200 and planner sentiment, but while some may suggest the GFC is over, the fact remains that markets are still volatile and investor and therefore planner sentiment remains subdued.
Perhaps it is this environment which gave rise to a recent incident reported to Money Management – that of an independent financial adviser (IFA) who was visited by a business development manager (BDM) from a major banking institution and invited to “identify some sales targets for particular insurance products”.
It seems the IFA had acquired a liking for this particular institution’s insurance products and had recommended their use to suitable clients.
In consequence, he had written a reasonable amount of business, giving rise to an incorrect assumption on the part of the BDM that he was somehow tied to the institution.
When the BDM consequently suggested that they agree some sales targets, he was left in no doubt that the planner was independent, intended to remain independent and had no intention of wedding himself to sales targets of any kind.
The incident may have been isolated but it appears to give substance to the argument that a “sales” culture remains deeply embedded in the financial planning industry and that the Future of Financial Advice (FOFA) changes may achieve little in terms of diluting that culture.
This continuing sales culture must also be seen against the background of the manner in which the FOFA changes have forced the vertical integration of the financial planning industry and allowed the major institutions, particularly the banks and AMP, to reassert their dominance in the space.
It must also be viewed in the context of the current distribution turf war between the likes of BT and the Commonwealth Bank, which has, according to some accounts, seen financial planners receiving up to $1 million in either “retention payments” or “transition fees”.
There seems to be no argument between the major players that they have their eyes clearly focused on the profitability of their platforms, and that both maintaining and increasing distribution channels is a necessary part of that equation.
However, the question now being asked in the industry is how the major players intend to extract an appropriate return from their investment in the payment of either “retention payments” or “transition fees”.
Some such as Paragem managing director Ian Knox have even suggested that planners who have received “retention” or “transition” payments from major players should be obligated to declare those payments to their clients, and explain how it might influence the recommendations they make.
Knox may have a point, in circumstances where surveys undertaken by Roy Morgan Research have consistently indicated that while consumers seem to have a reasonable understanding that if they deal with a Commonwealth Bank financial planner they are likely to be receiving a Commonwealth Bank product, they are far less aware of the linkages where groups such as Financial Wisdom and now Count Financial are concerned.
His claims also seem to grow in validity when the number of dealer groups formerly regarded as “independent” but which now owe allegiance to an institution are taken into account – something which is made very obvious in the upcoming Money Management Top 100 Dealer Groups data to be released later this month.
Not only has Count Financial moved under the umbrella of the Commonwealth Bank, but Matrix Planning Solutions remains on the market and a number of other groups have clearly signaled their willingness to be acquired if the terms are right.
To date, neither ASIC nor any of the industry representative bodies have seen fit to discuss either the consequences of continuing vertical integration or the implications of large “retention” and “transition” payments.
Indeed, somewhat surprisingly, no one has seen fit to discuss those payments in the context of remuneration and other payments impacted by the FOFA regime.
It remains to be seen how the regulator and lawyers might view such payments if, at some time in the future, investors incur significant losses as a result of either a corporate collapse or a product failure.
Recent history suggests financial planners who receive large payments from product manufacturers receive little sympathy when things go awry.
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