Unless financial planners understand this they will be the patsy again for all that is wrong in the industry.
I’m not condoning the lack of disclosure by some of the financial planners, but in some way that is symptomatic of the systemic flaws in our industry. The basic systemic flaw in our industry is that financial services reform (FSR) encourages the selling of a product to be dressed up as advice. This, to me, obviously leads to conflicts of interest. And then when you add in tied/aligned distribution you have a heady cocktail.
But there are more players than the institutions and there are many agendas being run by these players. The stakes are high. We are in an industry with mandated growth, with fat margins, but with an oversupply of product and low barriers to entry. More inflammable ingredients for the cocktail.
The players include ASIC, institutions, the Investment and Financial Services Association (IFSA) and industry funds, and each has its own agenda. But what they have in common is their propensity to blame planners for the ills of the industry.
ASIC’s agenda in part is to be looking strong and active. Picking on AMP is easy for many reasons. Its financial planners are contractors and AMP has defended commissions, most likely because it has come from having a product-selling sales force.
Which brings me to FSR. Again. FSR is about financial product advice, not financial planning. Yet ASIC insists it is about financial planning. And in doing this ASIC has played into the hands of those institutions that still want to sell product, but like the
idea that they can dress it up as ‘independent’ advice, irrespective of whether the adviser is salaried or a contractor – earning commissions or fees.
However, the big issue for ASIC (and the Australian Prudential Regulation Authority (APRA)) is conflicts of interest. And maybe that is really ASIC’s agenda.
Which brings me to the institutions. There is a world-wide movement to separate manufacturing and distribution. The reason is conflicts of interest. In Australia, APRA and ASIC appear to be keen to resolve these conflicts and some institutions have been encouraged to have independent directors on the boards of their funds management businesses. This might explain why some institutions are moving their contracted planners from commissions to fees. Could it be they want to stay one step ahead of the regulators to ensure they are not forced to sell off their tied/aligned distribution?
But what of those institutions with salaried financial planners? Surely, they don’t have conflicts of interest as they don’t earn commissions? These in the main are banks, and the solution for them resolving their conflicts of interest may be selling off their funds management and platform businesses.
Are platforms products or services? I don’t think it will be long before ASIC defines platforms as products, not services. If superannuation funds are products, why aren’t platforms?
On the subject of platforms, the early ones were established by dealers and advisers, not only for administration efficiency but also for control and additional revenue streams. Initially the fund managers opposed them, but when they saw their potential they hijacked them. Another time the financial planner was dudded.
And, now to the next potential dudding. IFSA is now making noises about becoming involved in advice giving. It is no secret that some in IFSA would like to take over the FPA. Now financial planners, how would you like your professional association to be owned and run by the product providers?
Why do I include industry funds in this commentary? They are more vertically integrated than many of the traditional institutions – they are now institutions with tied distribution. How often does an industry fund-aligned financial planner recommend anything but an industry fund? Another question of industry funds. What is fairer – a member of a superannuation fund paying individually for the advice they receive or for all members of a fund paying for the few who seek advice? To say they provide financial planning that is free is not true – unless they don’t pay their financial planners.
To me, the conflicts of interest issue cannot be resolved until the systemic flaws are resolved. FSR has to be amended to allow for either agents making product sales and advisers providing advice. The agents would be remunerated by the product provider and the adviser by the client.
This solution would allow institutions to decide whether they want to be in distribution or not, and if so, more honestly – like AMP use to be in the days of the AMP agent. Financial planners, this is the main game, and until you fight for it you will continue to be the puppets of the manufacturers, including the product providers, and the patsies for everything that is wrong in the industry.
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