A reality check for the regulator

What do the Australian Securities and Investments Commission (ASIC) and the Australian Consumers’ Association (ACA) really want from financial services? What can be left on ASIC’s reform agenda and what will be the implications for financial services participants? What will it take for ASIC and the ACA to trust financial planners?

We have recently been told by a senior ASIC officer that she doesn’t trust financial planners. How can financial planners survive the headline grabbing barrage of criticism by ASIC officials and those of prominent consumer advocates?

A case in point when the regulator recently said, while speaking to a so-called ‘independent’ association of planners, that managing conflicts is the biggest problem in financial services. On this point I digress — it would be interesting to know if the regulator is aware that some members of the same association are apparently in receipt of commissions from a preferred super platform with the landing of a special arrangement with a new superannuation entrant. This would seem to inhibit such members from calling themselves ‘independent’.

The ACA’s Peter Kell recently wrote about the need for the regulator to be given clearer powers to ban or limit certain types of conflicts. Presumably, he means powers to ban commissions. However, after a long article on why conflicts such as commission should be banned, the ACA offers no alternative on how advisers should be paid.

A historical perspective

A quick look at history tells us how the current conflicts, the so called structural corruption situation, in part emerged. It was on November 1, 1989 that ASIC’s predecessor, the Australian Securities Commission (ASC), cancelled individual adviser licenses with all individual practitioners being required to hold authorisation from either a licensed securities dealer or a licensed investment adviser.

This was the advent of proper authorities and the thrust of the legislation was to flick pass the supervision of individual financial planners from the ASC to licensees. Legal breaches by individual practitioners therefore put at risk the licensee’s legal right to provide advice through its authorised representatives.

Thus began the legislative requirement for advisers to be ‘tied’ to a licensee wherein advisers have to adhere to the advice criteria laid down by the licensee. The fact is that the large investment institutions — banks and the old three letter life insurance companies — have the greatest market coverage and, one could argue, the most costly supervision problems. However, it’s these businesses which are perhaps best equipped, in terms of numbers, to provide advice to the masses.

Sixteen years later and the regulator now cries that there is a risk that advisers will place the interests of their licensees over the interests of the client and that advice is likely to be inappropriate. And ASIC is surprised by the fact that, by its own hand, legislatively tying planners to a licensee results in planners recommending only licensee-approved products?

Fees vs commissions

Couple this almost comical irony with the now clear indication that ASIC may look closely at commissions versus fees and the ACA’s call for their banning. Lower socio-economic Australians now have every reason to believe they will never be able to afford financial planning advice.

The fact remains that advice is now more expensive to provide than at any other time in financial planning history in this country. Just imagine that ASIC one day moves to convince Treasury and the government of the day that commissions to planners should be banned.

It’s the first day of commissions to financial planners being banned and a new client appointment is made. A young couple have just relocated to new jobs and are again confronted with looking at the issue of superannuation. He earns around $50,000 per year and she about the same; they have around $20,000 superannuation each and a $300,000 mortgage, a car loan and a hard core debt (European holiday) on a home equity loan and are expecting a baby.

You discover in that initial meeting that neither has a will nor have they issued powers of attorney. They have no home contents insurance and you also discover that she has not changed her super fund beneficiary nomination from her previous husband. Their cost of living exceeds their after tax income and they have just a few hundred dollars in a savings account. The cold commercial reality is that this couple cannot afford to pay hourly rates to a planner to sort out the mess they are in let alone advise on super.

Affordable advice

Short of extremely high risk, well file-noted, pro bono advice, as a financial planner you would steer well clear of providing any advice because the hourly rate which needs to be charged for the first appointment; the preparation of the advice and the presentation of same plus a third meeting to answer the clients’ questions, will easily vaporise their savings account.

Such a situation could be overcome if the government is prepared to, in the interests of national savings and preparing the nation for retiring baby boomers and beyond, subsidise financial planning businesses so that they can at least break-even on the cost of providing super choice advice.

The alternative is the current method where many people pay for their services through a disclosed commission in a similar way as your bank charges you a commission — albeit undisclosed — on your savings accounts and term deposits.

In this country, we are quickly headed to a situation where only the middle and upper classes will be able to afford advice. Underprivileged Australians — people with no hope of ever being able to afford to pay for advice in commercially realistic hourly rates — should still be given the opportunity to receive quality advice, even if that means paying for it via fully disclosed commissions.

I call on ASIC and the ACA to proffer alternative viable planner remuneration models that will allow every Australian access to financial planning advice. In the absence of viable, realistic, alternatives, I submit that democratic market forces should prevail to allow the evolution of financial planning to continue without further commercial impingement by the regulator and cheap salvos from the sidelines by a consumer group chasing journal selling headlines.

Tarred with same brush

As for the un-ending criticism levelled at all planners, I for one am sick and tired of being lumped in with, and tarred with the same evil sticky brush, as those planners who are the subject of ASIC’s broad-brush public criticism and the ACA’s alarmist media releases and columns.

There are many advisers who run thoroughly professional businesses where client interests do come first — where full disclosure of fees is made each and every time we provide advice. And where commissions are rebated despite having to navigate ridiculous and costly administration burdens to do so.

Yet while such business owners prefer a fee-for-service method of operation, we recognise the stark reality that a lot of people cannot afford the fees and that some businesses are able to provide service for them via commissions.

Many planning businesses have for many years operated on a fee-for-service basis where commission is rebated to clients wherever possible and it’s time for ASIC and the ACA to give credit where credit is due. Broad and inaccurate headlines are misleading in the least and the public, whom they both serve, deserve more accurate comment with less alarm and distress.

At the coalface

Financial planning has come a long way in my 16 years in practice. Several million Australians now lead far more financially secure lives than they would have done 20 years ago and very little of this progress is due to regulation. It is primarily due to the professional development of financial planning by planners themselves.

The recent ASIC and ACA public comments have done more harm than good and serve only to potentially undermine existing, thoroughly professional, relationships between many financial planners and their clients.

It’s really very easy to write headline grabbing media releases. It takes true professionalism to put one together that is balanced and accurate.

It’s high time for the regulator and the consumer advocate to sit at the coalface alongside professional financial planners for a few days, as they go about their daily duties, to get a taste of reality. Through this they will see that we’re not all crooks looking to deceive clients. Indeed, they may find that the air is much fresher outside the confines of a one dimensional, boxed-in, view.

Well may the regulator infer, and ACA say, that fees are better than commissions. For if the day ever comes that commissions are banned and advising only to the comparatively wealthy is commercially viable, who will come forth to advise those who are less well off — those who cannot afford to pay fees? Who will it be indeed?

Ray Griffin is a Tamworth-based planner and former chairman of the Financial Planning Standards Board International CFP Council.