Debunking five common planning myths

The financial services industry is guilty at times of too easily presuming it knows what is best for consumers, and what is not. We need to clear away the myths created by presumptions about what is important in our industry — it is what consumers want that we should really understand.

Earlier this year, AMP spent four months talking to around 1,700 consumers about what they wanted from financial planners. The research helped uncover the five most common myths in our industry.

Myth 1: Independence versus impartiality

It is said consumers are wary of product manufacturers that are also involved in financial advice. But when AMP asked consumers about this, the great majority said a planner’s association with a well-known brand gave them a sense of security.

Most consumers want to deal with someone local for reasons of convenience, ease, and so on. They also want to deal with a specialist in financial planning, who knows what they are talking about. But, most of all, consumers want to deal with someone they can trust.

For consumers, independence means ‘focus on me and my needs’ — it doesn’t mean having separate corporate structures.

Obviously, some consumers prefer dealing with a planner without ties to a major company — in spite of some of the risks they acknowledge it can bring. But these consumers were in the minority according to AMP’s research.

To be successful today, financial planners must act in the best interests of their clients and not in the interests of the product manufacturer or asset manager that supplies them, regardless of who owns their dealer group.

Myth 2: Financial planning advice is for wealthy people; it doesn’t help middle Australia

AMP’s research found that among more than 600 Australian households with an average annual income under $65,000, those with a financial planner were significantly better off, and more financially secure, than those without a planner.

These households were much more likely to have accumulated greater wealth than similar households without a financial planner. The households were:

n twice as likely to have investable household assets of between $100,000 to $249,000;

n four times as likely to have accumulated investable assets of between $250,000 to $500,000; and

n twice as likely to have accumulated investable assets worth more than $500,000.

They were also more likely to:

n have long-term financial goals (59 per cent of households with a planner compared with 46 per cent of households without a planner);

n have a reasonable idea of how much money they would need in retirement (58 per cent compared with 44 per cent); and

n feel financially comfortable (54 per cent compared with 47 per cent).

The question is, did the better-off households go to see a planner because they had more assets, or did seeing a planner result in them accumulating more assets?

Either way, it is interesting and significant that these substantial differences in wealth arise in households of similar income levels.

Myth 3: Trail commissions are flawed

Trail commissions get a lot of bad press partly because our industry has not explained how they’re structured, what they pay for and what behaviours they drive.

Trail commissions give consumers a choice about how they pay for their advice. They also allow people who can’t afford upfront fees to pay over time for advice received today. Often it’s the very people who need advice the most who also need the greatest flexibility to pay for that advice.

About half the consumers AMP talked to earlier this year preferred to pay for advice either through trail commissions or a mixture of trails and fees.

In themselves, trail commissions are inherently neither good nor bad. They’re just another option. Our job is to ensure consumers understand this and that they have a choice on how they pay for their advice — fees, commissions or some combination of both.

Myth 4: are reluctant to pay for advice

AMP found around 90 per cent of consumers surveyed were prepared to pay for financial advice. If consumers are prepared to pay for it, then they must value it.

Rather, the issues for consumers are around clear disclosure of fees and commissions. They want to understand exactly what they are paying for and what they are getting in return. They want to choose how they pay and many prefer commissions to be part of that. They want a clear understanding of the relationship between the planner and the product supplier.

These are all reasonable expectations. The fact that these expectations are not always met as well as they should be is something our industry needs to change, even though we have come a long way over the last few years.

Myth 5: Choice of superannuation fund will open the floodgates to mis-selling and rip-offs

Some people think by merely giving consumers a choice over where their superannuation money goes, we’re opening the floodgates to the sort of awful mis-selling the UK experienced in the late 1980s and early 1990s.

But there is a very real difference, particularly at a regulatory level, between the UK industry 20 years ago and the Australian industry today. These differences make mis-selling extremely unlikely and certainly against the law under the Financial Services Reform (FSR) regime in Australia.

If there is a risk involved in choice, it lies in areas not covered by FSR, where consumers may be persuaded to move out of their regulated industry fund or retail fund into a self-managed super fund.

There are some 300,000 of these funds in Australia, and about a third have less than $100,000 invested in them. With so little invested, how can this be a sensible strategy? Self-managed super is an area that requires very specialist knowledge.

Where we can do better

We need to continue to make improvements in our disclosure around fees and charges and we need to improve consumer education, in particular.

This is an important issue because knowledge underpins true consumer sovereignty in any market.

So, let’s focus on the real issues of concern to consumers.

n Consumers are more concerned about planners acting in their best interests than they are about structural independence.

n They do expect to pay for financial advice — but they want choice in how they pay and want to be clear about what they’re getting in return.

n Good financial planning helps middle Australia and middle Australia has just as much right to financial security as wealthy Australians. So restricting their access to good financial advice by limiting the ways they can pay for it doesn’t make sense.

n And finally, choice of fund will benefit consumers by giving them more control over one of their most valuable assets.

Despite the periodic hand-wringing, Australia has a very good wealth management industry. And I think we have a better chance of building a great wealth management industry than just about any other country in the world.

Craig Dunn is managing director, AMP Financial Services .