The Financial Services Minister has been equally praised and criticised for the delivery of the Future of Financial Advice (FOFA) reforms.
In the wash up, the reaction to the reforms has been mixed. Last week, IFA reported on what the reforms will mean for the industry. The outcome painted a lopsided picture.
In this week’s magazine we have chosen to look deeper into one of the key issues of FOFA – the banning of commissions on insurance inside superannuation. While many would attest that opt-in or volume rebates will be the largest concern to the industry, the feedback on this reform element, in our view, has created the most noise.
Some participants are still scratching their heads as to how and why the government reached the decision to create a two-tiered commission system.
Others are cursing the day Shorten was placed in his portfolio. Then there are some who are just ‘getting on’ with things.
Unsurprisingly, Shorten has done a stellar job of dividing the industry with these reforms.
In his defence, however, in March he did warn the industry the reforms would not keep everyone happy. In his words, the reforms are in the best interest of the clients.
However, in an open letter to Shorten, Bailey Roberts financial adviser Michael Brown said the reforms had left him with a few questions about how effective the new reforms really were.
In his letter, Brown used the example of Storm Financial and whether the FOFA reforms would put a stop to bad advice.
“Will banning commissions prevent an adviser from giving all clients the same, standardised advice? Or prevent an adviser from recommending inappropriate strategies?” the letter said.
Brown said before the government fixed “these problems”, it was perhaps appropriate to look at what happened when the government tried to “fix” the managed fund industry in the 1990s.
“Back in the ‘bad old days’ a fund manager was overseen by an independent trustee – whose job it was to keep an eye on the fund manager,” the letter said.
“After the spectacular collapses of several funds – like Aust-Wide and Estate Mortgages – the government set up an inquiry into the managed fund industry. One of its main findings was that funds failed because the independent trustees didn’t do their jobs properly.
“So, in a brilliant flash of inspiration, the government passed new laws that replaced both the fund manager and the trustee with. (wait for it). one entity! Yes, that’s right – one entity that had the obligation to keep an eye on itself!”
Brown said it seemed to be the government’s view that if something was worth fixing, “it is worth fixing over and over”.
“With the exception of superannuation, there is no other area of financial services that has been subject to so much government inquiry and intervention,” he said.
“Even with all this reform, in the last few years almost half of all fund managers have entered administration and Australian investors have lost (sorry, the new term is ‘frozen’) $21 billion of their life savings. Compare this to the $8.8 billion lost through bad advice – like Storm. Bill, how is it that we have had so much government intervention and yet so much failure?”
While Brown’s words are fiery, he is not arguing against government intervention or the need to reform Australia’s financial advice industry.
“All I am really asking is – on behalf of the investors of Australia – could we please have some effective reforms that will stop history from repeating itself?” he said.
