Theideaof capping fees and commission seems to have been triggered by the recently released Sandler Report in the UK.
Having spent most of the past 18 months working with offshore regimes, I can report that the Australian regulatory environment and financial planning market is not only different but also more advanced.
At the UK financial planning conference, IFP UK president Simon Williamson, who recently visited Australia and met with key parties here said, “I have seen the future and it works”. He was not referring to Australia’s team for the forthcoming Ashes series.
Our regulators, politicians, industry associations and participants are to be congratulated on the progressive nature of our industry. However, we are by no means perfect and still have a lot of development ahead.
This development should grow from the solid base we have, not by replicating ideas that address issues specific to overseas markets.
The fee and commission discussion should be about disclosure — not about the means by which a consumer chooses to pay for professional financial planning advice.
For advisers, the debate should not be whether advice is worth something on some products, but not on others. Transparency is the issue, not the mechanics of charging.
In thinking this through, I have tried to be as methodical as possible in reasoning out the issue.
Is the provision offinancial planning adviceto Australians a goodthing?
Yes — both from an individual consumer and national savings perspective. The accumulation, maintenance and usage of wealth in a manner appropriate to an individual’s circumstances is important.
Should such financialplanning advice be provided by professional, wellqualified and competentadvisers?
Yes. We are talking about individual’s livelihoods and futures. We are living in a highly complex superannuation, taxation and investment environment that demands professional help.
Enhancements to our industry brought about by the Financial Services Reform Act (FSRA), PS 146, developments in the Diploma of Financial Planning all require that advice is provided by qualified individuals.
If a financial planner isprofessional, well-qualified and competent,should they be entitled tobe paid for their services?
Of course they should. Advice that determines lifestyles and livelihoods has a demonstrable, calculable value. And we all know the old adage about peanuts and monkeys!
Should financial planners have the option toelect how they would liketo be paid and should consumers have the right tochoose how they wouldlike to pay?
Yes, on both accounts. The opportunity for the consumer to pay upfront or ongoing by writing a cheque, arranging a direct debit facility or by commission should be and is available. According to the Financial Planning Association (FPA), 75 per cent of members offer the option of fee for service or commission.
Providing good advice inevitably incurs high, upfront fixed costs. However, consumers with modest incomes or simple financial affairs (such as those paying Superannuation Guarantee contributions) may find it financially hard to meet the upfront cost of good advice.
It has been suggested that the use of trail commissions for Superannuation Guarantee advice be denied by regulation. How then would the upfront cost of advice be reduced so as to allow universal access to financial planning for these consumers? Payment via commission, that disperses the cost of advice over time, would appear helpful rather than harmful in this situation.
The important issue, irrespective of how payment is being made, is that the consumer should know what they are paying for and how much they are paying.
This is the nub of the issue — it is not a debate of fees versus commission, nor should it be about capping or banning methods of payment — it is an issue on how we as an industry disclose costs (in whatever format) to consumers.
The challenge for the industry is to define any payment method and what this payment is for in a way that consumers understand. A lot of progress has been made in this area by both the regulator, and the Investment and Financial Services Association (IFSA) and FPA practice notes — however, there is clearly more to do.
I am sure some will argue against disclosure, and instead pursue capping and or disallowance of fees on certain products. They will argue that only by doing this can the few who abuse the system be stopped.
The FSRA provides consumer protection against unethical financial planners. In particular, the FSRA sets out rules that regulate the conduct of and disclosure by planners to ensure that they are acting in the best interest of the consumer.
The Act does not discriminate between the payment method of a planner, rather it focuses on the conduct of the planner as the guiding principle.
Disclosure that allows consumers to compare and understand costs between providers (both initial and ongoing) benefits all parties. Following the release of the Ramsay Report on September 26, 2002, there is sure to be lots of debate and discussion on how to do this. This is healthy as I believe we will be debating the right issue.
Sarah Brennan is a consultant to the financialservices industry and anFPA board member.
