Has industry growth benefited consumers?

As this is my 50th article forMoneyManagement,I thought I’d do a retrospective and see how the industry has changed since my first article. A lot has happened over the past four years, but in many ways, as much as we change, we remain the same. In some ways the industry has progressed, but in other ways it has regressed, especially in the areas of fees and disclosure.

My first article was about direct distribution, and how it was going to be the next big thing. I even asked if “the NextDirect Conference ’99 would be bigger than the FPA convention?” I can’t remember if there was even a NextDirect Conference in 1999. Two of my most memorable columns were letters to the then current chief executives of the Financial Planning Association (FPA) — but more on that later.

The industry is slow to change. It seems that it doesn’t want to change anything that is not ‘broke’. The issues over the past four years have been: technology, platforms, regulation, fees (and disclosure), and distribution emerging as being the key link in the value chain. From time to time we have even thought about the consumer.

The industry has started to utilise technology. Interestingly enough, it hasn’t been the fund managers that have been driving this. As I have said in some of my recent articles, the industry has been too successful to consider efficiency. The margins are still fat, the industry is growing at a healthy rate — so, life is beautiful.

The technology drive has mainly come from the platform providers as they try to automate the transactions between themselves and advisers. The wraps initiated much of this as they competed for advisers’ attention. The wraps have been the success story over the past four years. But I’m not quite sure what a wrap is anymore. I thought they were non-superannuation custodial services — the marketing name for IDPSs, but even I can be wrong.

Well, four years ago, the Australian Securities and Investments Commission (ASIC) was still to happen and we were all talking about CLERP 6. Now we have ASIC and the Financial Services Reform Act (FSRA), are we any better off? Is the consumer any better off? My considered, but general view is, no! The one regulator is a good thing, but even there, do we really have one regulator? You could argue superannuation has three, being: ASIC, the Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (for DIY funds).

In my various articles I’ve argued about how the promotion to the consumer of the one regulator and full disclosure is misleading. Neither ASIC, nor FSRA, cover debt products or real property. And the definition of advice is product related. The two-tiered regulatory structure for dealers/advisers has remained, and we have representatives and authorised representatives (depending on employment status) just to confuse us even more.

Before I argued, and I’m even now more convinced, seeing the early outworkings of the introduction of the FSRA, that licensing should be replaced with registration. This would enable ASIC, with its limited resources, to spend more time policing the industry, rather than processing licensing applications. More importantly, it would free the industry up from a lot of time consuming and onerous bureaucracy.

Fees and disclosure are two areas where the industry has regressed over the past four years. We have this continuing debate over fees versus commissions, which is really not the issue. The issue is disclosure.

Many say that advisers are now more fees based, but I’m yet to find any real evidence of that. But it depends what you call a fee. It appears that some advisers do not regard a trail as a commission — and trails are going up. (When trails first came in, they were about 25 basis points — today they can be as high as 60 basis points, with the average around 40.) And the amount earned on the placing of a portfolio based on the value of the portfolio cannot really be described as a fee. Others do not regard the commissions paid by platforms as a commission.

However, recently the real loser has been disclosure. Some advisers do not seem to think that they have to disclose any interest that they or their dealer may have in the platform being recommended — not an investment product, just an administration service. Also there is now the start of a trend by platforms to bury the adviser’s ongoing commission in the unit price. It seems that some advisers complained that they had trouble explaining their monthly fee line on the client’s statement.

It also appears that at the tax effective, property syndicate end of our industry, there are some advisers that are not beyond holding managers to ransom. They promise the manager funds, but delay providing it until the last minute, at which time, they then ask for more commission. I’m sure this is fully disclosed to the client!

One of the biggest changes we’ve seen over the past four years has been in distribution. Distribution is now in — the institutions want in, the banks want in. The consolidators have come, and nearly gone. The superannuation funds are now moving in, and the accountants are slowly getting their act together. And advisers are still focusing on the pre-retiree and retiree.

Today’s financial planner is still basically doing financial planning the way it was done 10 years ago. They may be using a platform, but that’s for administration and business value purposes. Advice is still complex and over-engineered. As a result, they can only afford to see clients with reasonable lump sums — which means pre-retirees and retirees. They’re in for a big shock when the new distribution players pick up the wealth accumulators and retain them through pre-retirement and retirement.

Which now gets me to the FPA. Over the past four years, the FPA has missed so many opportunities. They could still be pre-eminent in the industry, but now they represent less than half the advisers in the industry. They had the opportunity to make CFP the designation — but now we have five. They controlled education, but were slow in offering a variety of delivery modes.

On a sad note, since I started writing this column, we have lost Arthur Russell and Jock Rankin, both who made this industry richer and more vibrant by their contribution. Both men of integrity, and both men who could engender passion. They are sorely missed.

What will the next four years bring? Straight-through processing, consumer focus, proper disclosure, the breaking of the nexus between advice and implementation and affordable financial planning to the wealth accumulator. One can dream, one can look back and see what this industry has achieved over the past 10 to 20 years — and say it has achieved a lot. I would suggest this is because it has been young and vibrant. As we grow up, let’s hope we remain young and vibrant — but more importantly, develop a better consumer focus.