FOFA exposes the financial planning industry's divisions

Another round of research aimed at defining the attitudes of financial planners appears to have confirmed the existence of a generational divide on some of the key questions. Mike Taylor reports.

According to data collected by the Australian Electoral Commission, the Australian mining industry spent about $22 million on the television advertising campaign that saw the Federal Labor Caucus overthrow former Prime Minister Kevin Rudd before installing Prime Minister Julia Gillard, who promptly scrapped the original resource super profit tax.

By some estimates, industry superannuation funds have spent a similar amount on television advertising year-on-year for nigh on half a decade.

The question that many financial planners will be asking themselves is whether their industry organisations — the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) — might be capable of mounting a similar campaign to overturn the less palatable elements of the Future of Financial Advice (FOFA) changes and Cooper Review recommendations.

What is clear from recent research commissioned by the AFA is that while many financial planners may regard the imposition of changes flowing from FOFA as a fait accompli, there is nonetheless a sense that they are being ‘railroaded’.

Worryingly for those representatives of the AFA and FPA who have been negotiating with Treasury representatives and making representations to the Assistant Treasurer and Minister for Financial Services, Bill Shorten, the research also suggests there are many planners who still do not support the already broadly-agreed areas of change.

Commission-based remuneration may be a dead letter in the minds of those negotiating with the Government, but the AFA research suggests that it is not a dead letter in the minds of its members.

The research, conducted for the AFA by CoreData, found that “the advice industry is divided over the prospective ban on commissions, with two in five advisers opposing the reform (42.8 per cent) and a further 36.1 per cent strongly supporting it.

The CoreData research appears to confirm the emergence of a divide within the financial planning industry which could be deemed ‘the haves versus the have nots’.

The ‘haves’ are those financial planners who have been in the industry for a long time and, as a result, have long-term clients and, by definition, a solid accumulation of trailing commissions.

The ‘have nots’ are the more recent entrants to the financial planning industry, for whom commissions do not represent a significant or viable part of their business.

The bottom line for the financial planning industry is that some planners are just as vehemently anti-commission as the polemicists within the industry superannuation funds.

Their reasons are simple enough — they have no interest in protecting revenue they might never have receive from trailing commissions and they intensely dislike the perception that all advice is tainted.

There will, too, be some in the financial planning industry who will perceive a correlation between educational standards and those opposing the removal of commissions.

The research found that the most commonly held qualification in the industry was a Diploma of Financial Planning (40.6 per cent) followed by RG146 (37.0 per cent), while those holding a Certified Financial Planner (CFP) designation or university undergraduate degree accounted for 35.2 per cent.

The CoreData research quotes adviser reactions to the remuneration question and the ban on commissions as follows:

• “Although this reform will cause some pain as clients are reminded of the full cost of advice, it is ultimately a worthwhile change as it removes any possibility that advisers are motivated by commissions rather than clients’ best interests.”
• “I support the ban on commissions on investment products, however strongly disagree with a ban on commission on insurance products.”
• “It is important to have laws that ensure there is no conflict of interest if we ever want to become a profession. No one takes us seriously otherwise.”

However, these comments need to be compared with those who remain strongly pro-commission, such as:

• “A lot of low value clients won’t be able to afford to pay for advice. At times these people need advice and can grow to be high value clients.”
• “Clients are expressing concern that commissions via funds uunder management relieved them of having to pay upfront for advice. Regional clients are not as wealthy and have less surplus cash flow, however, they are still happy to have their financial planner paid for the advice in an alternative form. Fee-for-service reform could effectively make access to financial planners unaffordable, which will place an already disadvantaged sector of the community at further disadvantage.”
• “An overreaction. I am frustrated that the likes of Storm Financial have made it tough on all of us.”
• “Governments should not interfere in commercial process. Businesses and customers should be free to choose the method of remuneration.”
• “How can a democratically elected Government dictate to people how they can pay for service they chose to have?”

The AFA research appears to have confirmed the existence of a divide within the financial planning industry based in large part on age and education, and it is a divide that will make it hard for the industry to emulate the mining industry in mounting a viable defence to unpalatable Government policy.

The mining industry scored a victory because it was united.