If proof were needed of the need to overhaul our financial-planning system it came again last week with the results of yet another shadow shopping exercise by the Australian Securities and Investments Commission (ASIC), the financial regulator.
Its results found that only 3 per cent of financial plans prepared for clients were "good" while 36 per cent were classified as "poor". The remaining 64 per cent were merely adequate.
This is a dreadful result - over a third of planners were giving bad advice - quite possibly leading to big financial losses or, at the very least, lost opportunities.
This is an area in dire need of structural reform to raise standards - and laws are currently being thrashed out to deal with this. Last week we saw yet another episode in this painfully slow legal process as the Parliamentary Inquiry into the proposed reforms saw all interested parties put their sides of the argument forward yet again. Key proposals include the banning of commissions on investment products, in addition to volume-based rebates (kickbacks for providing a certain amount of business to a particular company) and a requirement that financial planners act in their clients' "best interests".
It still staggers me that doctors and lawyers must by law act in a way that is in the public's "best interests", yet, quite deliberately, the financial planning industry has been operating under a different legal requirement: merely that planners give advice that is "appropriate." Not only is this a loose and clumsy cop-out that allows shabby advice to pass as "adequate", it is a betrayal of the trust that clients bestow on them when they enter their offices.
That leaves millions of Australians vulnerable to dodgy advice and huge losses, as we have seen from such scandals as the Westpoint and Bridgecorp collapses where planners were flogging investments promising eye watering returns because they were receiving enormous commissions on the sales.
It is widely accepted that commission payments create a bias towards sales of products that pay the most, so this should not be such a controversial piece of legislation. But the industry is protesting that the changes will lead to mass job losses and cost too much to implement. Claims that are disputed by Treasury and the Financial Ombudsman.
Yet vested interests of the financial planning fraternity is making it difficult to get this legislation enacted.
Even if it does go through in its current form, you will probably not notice a difference. Almost all the changes are not retrospective, meaning that if you're paying commissions now you will continue to do so in future. The overhaul is intended to benefit consumers and their dealings with financial planners in the future.
But the one change that will benefit existing investors is also the one that is arousing some of the stiffest opposition: the requirement for planners to send out a financial statement to every client each year detailing how much commission they have paid.
The industry argues that commission payments and fees are already set out in the initial product disclosure statements, but let's be honest, who really gives these a thorough read?
An annual statement from your adviser, on the other hand, will show exactly how much you're paying your planner each year - and many will be surprised to see they are paying anything at all.
An estimated two thirds of financial planning clients do not regularly see a planner, and many others have never met a financial planner but are paying commissions - often through their work super fund. The commissions likely to show up here are trail commissions, payable each year on a variety of financial products whether or not your planner has done anything in the previous 12 months to earn the money.
Clearly, the industry does not want people seeing the commissions spelt out so clearly, for fear that many will object, try and prevent the commissions being paid or switch to a rebate broker such as Yourshare.com.au, who simply takes a custodian role over your financial products and rebates you most of the trail commissions - saving you a fortune in the process.
There are clearly many planners that are doing an adequate job, but mediocre is not good enough, especially when it comes to advice that can determine our financial wellbeing and for the rest of our lives.
It's time to end the culture of onerous fine print, kickbacks and over-complicated remuneration systems and give investors better-quality advice at a fair price. This is not an impossible business model. Mark Bouris is busy making a fortune with his expanding network of Yellow Brick Road financial services offices, where planners work on a fee for service basis instead of commission.
If he can do it, so can everybody else.
| An Economic Normal Seems A Long Way Off |
| Super Slump |
| Banks Unfair Treatment Of The Self-Employed |
