How much is a financial adviser’s independence worth?
John Hewison believes the financial planning industry cannot move much forward until the link between product and advice is broken.
The fallout from the introduction of the Future of Financial Advice (FOFA) reforms has been widespread. Consolidations, mergers and takeovers of financial planning firms by institutions have contributed to a rapid decline in the number of independent, non-aligned planners.
FOFA’s commendable intent was to remove conflicted and/or hidden commission-based remuneration streams and conflicted advice.
But the Government failed to realise just how complex the financial services industry is, and just how close a relationship is between the institutions that develop financial products and those who provide advice.
These institutions now control a vast majority of the advice providers in Australia, as evidenced by Money Management’s recent dealer group survey.
Whilst future product commissions may have been banned, existing product related ‘trail’ commissions are exempt and have become the subject of market trading commodity between advisers.
However, it was amusing to read recently how the purchaser of a ‘book’ of trailing commissions was aghast at the suggestion by the product distributor that they required client approval to transfer the commission stream.
I guess this says it all; many industry players believe they are entitled to trade product commissions without any reference to the paying customer, whom they have never even met.
Of course the big-ticket items are administration platforms and the revenue streams they generate.
Their evolution is reminiscent of the 1980s, when the practice of buying distribution networks via massive ‘development loans’ to financial planners was rife.
There is no doubt that historically, product manufacturing institutions control the revenue stream in the provision of financial services in this country and see advisers as their sales force or distribution network.
There is no money in the provision of advice for the corporations, it is all about the product and the platforms and it is all about funds under management.
The institutions will argue that advice provided by their aligned advisers is not conflicted, as they include external product on their recommended lists and there is to be a ban on incentive payments to sell in-house product.
The Financial Services Reform Act 2011 is the legislation that governs the provision of financial advice and provision of financial services. It is good legislation but it has two major flaws.
Firstly, it is purely based on advice for the provision of product and/or services and secondly, it is a two-tiered agent/representative-based scheme.
Therefore, it is geared towards the institutions that manufacture product and need a method of distribution to the investing public.
The only relationship that should exist in the provision of financial planning advice is between the client and the adviser.
That relationship is based purely on the provision of strategic advice intended to address the client’s financial concerns and provide solutions and outcomes according to the client’s stated objectives.
None of this has anything to do with product. In fact, our view of investments is that they are a by-product of strategic advice, or tools to be used in conjunction with advice.
Clients should know whether their financial planner acts solely for them in the protection of their interest.
They should be in no doubt about whom they pay and how much they pay and the services they receive.
Whilst the Government should be applauded for what it set out to achieve with FOFA, the financial services industry should lament the diminishing availability of truly independent advice and services to Australian consumers.
Ultimately, it will take a complete overhaul of industry practices, control of revenue streams and the governing legislation to rectify the issues of conflicted advice.
As a basic principle, the investing public must be entitled to have a complete understanding and control payments made from their capital for services rendered.
We can only hope that eventually, financial planners will be categorised as true professionals and subject to all the education standards, quality checks and balances that apply to all professions, including individual accountability.
That way, the nexus will be broken between product and advice, giving the consumer greater certainty of independent advice with an absence of any conflict of interest.
John Hewison is the chief executive officer and founder of Hewison Private Wealth.
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