It’s worth asking who’s paying your financial advisor
Financial planners will no doubt tell you the world has just ended. The government’s corporate regulator, the Australian Securities and Investment Commission (ASIC), this week revealed proposals to ban all commissions, volume bonuses, kickbacks and percentage-based fees paid to financial advisers.
But while the industry launches into a noisy whinge, consumers are likely to see things differently.
For years consumers have been struggling to figure out if financial advisers are really working for us or whether advisers are simply pushing financial products to serve their own financial interests.
ASIC’s new plan for regulating financial advisers will settle things once and for all. If these proposals become law – and they should – the client will legally come first and payments or fees that skew advice will be banned.
Commission-based remuneration has been long criticised by consumer advocates. That’s because commissions create an ethical dilemma for financial advisers. They place the interests of the adviser in direct conflict with the interests of their client because the payment to the adviser is set and paid by the financial institutions that churn out the products. Commissions encourage adviser loyalty to the product provider instead of loyalty to the client.
Structural conflicts of interest like these are endemic in Australia’s financial services sector; they undermine the quality of advice and products provided to consumers.
We currently have a regulatory regime which pretty much says “anything goes, as long as you disclose”. But this disclosure-based regime is a poor solution to conflicts. It generates information that consumers can’t use. Clients are presented with lengthy statements of advice detailing all sorts of conflicts and kickbacks and are left to figure out what it all means for themselves.
For example, to what extent should a consumer value advice differently on financial products with an upfront commission as opposed to products that have a trail commission, or a buyer-of-last-resort arrangement? What combinations of these conflicts might produce the most bias? What does it actually mean, in dollar terms, to apply a discount to advice in this way? The answer to these questions cannot be found in a disclosure document.
ASIC’s proposal will not only change the way clients pay for advice, it also proposes a new fiduciary between the adviser and the client.
The idea of a fiduciary responsibility that puts the interests of clients first and foremost isn’t new. Britain already has similar laws. And current thinking in the Obama administration is to ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary but are not in the investors’ best interests.
Australians are regularly exhorted to take responsibility for their financial security during their working life and beyond. And we do a pretty good job of it. With more than $1 trillion in superannuation accounts, Australia has one of the highest retirement savings rates in the world and around 36% of adults directly own shares.
But managing your financial affairs is not a simple matter. Too often CHOICE is contacted by members of the public who have suffered significant financial losses when the timely assistance of quality financial advice may have averted disaster.
Since the significant deregulation of the financial services sector more than twenty years ago the range and complexity of financial products available to the average Australian has been utterly transformed. At the same time the riskiness of some products has increased.
The need for independent, impartial and unbiased financial advice has never been stronger and yet the financial services industry is - for the most part - failing to provide this.
Opportunities already exist for advisers to break free from big financial institutions and charge fees that don’t bias their advice. A small group of market-leading advisory firms have already dumped commissions and other incentive payments in preparation for an advice industry that is wholly independent and unbiased.
The reforms ASIC proposes have been a long time coming and it’s a shortsighted industry that doesn’t welcome these reforms. Consumers need assurance of impartial and unbiased financial advice if the industry is going to serve its role in society and that’s precisely what ASIC’s proposed reforms deliver.
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