FOFA delivers a reality check

With the Government having released its FOFA proposals, Rick Cosier writes that financial planners have fallen victim to a range of blatant misconceptions that need to be recognised and addressed.

Like most other financial advisers, I have been living in a state of suspended animation, awaiting the exact nature of the FOFA reforms. Expecting the worst whilst hoping for the best. Now that the reforms have been announced, it seems that some critical messages have simply not got through to the people that matter.

The relentless campaign by the industry super funds has convinced the government that if they ban commissions and rebates and do everything they can to prevent advisers getting paid via deductions from a client’s investments, everyone will live happily ever after. In my opinion, these measures are based more on political agendas than on the major underlying issues.

Furthermore, there is a series of ‘inconvenient truths’ that are blatantly obvious to financial advisers but have been either papered over or totally ignored.

Inconvenient truth number one

The people most in need of financial advice are working families with a mortgage to pay, kids to educate, elderly parents to look after, student children living at home.

These people invariably have a cash flow problem already. Given a choice between paying an invoice and having the money deducted from their super account, does anyone really think that they would prefer to pay a bill?

Inconvenient truth number two

Contrary to the industry funds and media ravings, asset-based fees are not ‘commission by another name’.

Commissions are hidden payments to licensees by fund managers/platforms which the client cannot access, even if they sack the adviser.

Asset-based fees are mutually agreed, transparent fees paid from the client’s account balance which the client can turn off at any time. The ‘opt in’ provisions are an unnecessary, onerous and expensive impost which will force many independent financial planners out of business.

Inconvenient truth number three

Situations where Australian investors have lost lots of money have been caused by criminal or fraudulent activity by licensees, or bad product design by manufacturers.

None of the forthcoming legislation addresses these. Commissions were often a symptom but not the underlying cause.

Inconvenient truth number four

Licensees are responsible for the training of their employees/representatives and have absolute responsibility for their actions and advice. In turn, these organisations are regulated by ASIC which is supposed to make sure the licensees are operating properly and identify any misdemeanours.

If this system is not working, it will not be fixed by banning commissions and rebates.

Inconvenient truth number five

Rebates are paid by platforms to licensees, not financial advisers. In most cases financial planners have no knowledge of exactly what is paid to their licensee.

So how can they possibly affect the advice? And there are usually hundreds of products from dozens of different fund managers listed on the platform menu. A platform is not a product, it’s a supermarket.

Inconvenient truth number six

Insurance commission in super is usually a relatively small amount of money deducted on an annual basis from a client’s account. Insurance outside super is usually a relatively large upfront commission payment with a relatively small amount paid annually.

The former will be banned, the latter will not. Ask yourself whether this measure ‘will see Australians receive advice that is in their best interests’.

Inconvenient truth number seven

The Industry Super Funds campaign has damaged the reputation of financial advisers to such an extent that many Australians have decided to set up their own self-managed super funds.

Most of these people do not have the time or the expertise to run their own funds, are doing it ‘on the cheap’ and a sizeable proportion are non-compliant. Why are these funds not regulated properly?

Inconvenient truth number eight

The average financial adviser does not make much money. Do Bill Shorten and his cohorts know that the cost of running a practice is rarely less than $250,000?

Office rental, support staff, professional indemnity insurance, compliance costs, research, licensee fees, IT, accounting, auditing, etc, etc.

The majority of these costs have to be paid monthly. The Industry Funds campaign gives people the impression that financial advisers are making millions by cheating innocent people.

The average superannuation balance is barely $20,000 and the commission is at best 0.6 per cent per annum. This adds up to the princely sum of $120 a year. Given that the average retirement age is 57, has anyone actually bothered to look at how realistic the ‘compare the pair’ statistics are?

I accept that commissions are bad and should be banned. I accept that many financial planners focus exclusively on selling product, and this is also bad.

However, our profession has the potential to do an enormous amount of good. To help people with their cash flow, debts, investments, super, insurance, estate planning and tax.

Yet this potential is being destroyed by people and organisations with ulterior motives, aided and abetted by government officials who seem disinclined to ask the right people the right questions.

Rick Cosier is a practising financial adviser with his own AFSL.