The final package of financial planning reforms announced by Bill Shorten this morning is real economic reform, and for that matter real Labor reform. For all the criticism of Shorten and his ambition, he’s delivered a good package.
In particular, he’s held out against a strong under-the-radar campaign by the financial planning industry, revealed by Crikey earlier this year, against the critical “opt-in” requirement that will mean clients specifically have to agree to fees being deducted for financial planning advice that many never ask for.
Instead, along the lines of the compromise proposal trailed in the media by Shorten some weeks ago, there’ll be a biannual opt-in requirement, not an annual requirement as initially proposed by the previous minister Chris Bowen.
The campaign by the Financial Planning Association, which portrayed financial planners as mum-and-dad businesses threatened by the reforms, obfuscated the fact that the reforms are prospective, meaning that hundreds of thousands of Australians will continue to “receive” financial planning advice they never ask for and pay for via lower investment returns. Industry sources estimate this is costing Australians $5 million a day in fees.
Other reforms intended to remove the incentive for biased financial advice, including the ban on commissions and commission-like payments, volume payments and soft payments, are also prospective. These will take years, maybe decades, to have full effect, although the statutory “best interests” duty, more flexible advice structures and moves to professionalise financial planning, will start from when legislation is passed.
Nonetheless, there are major long-term economic benefits to Shorten’s package, even if they won’t materialise until long after this current generation of politicians has moved on. By ending the current arrangements whereby clients’ disengagement is used to funnel hundreds of millions of dollars out of long-term investments and superannuation accounts and into the pockets of financial planners, the owners of retail super funds — mainly, the big banks and AMP — and financial planning platforms, the retirement incomes of hundreds of thousands of Australians will be significantly higher than they would otherwise have been, reducing the call on future budgets. And working Australians will be the main beneficiaries.
The financial advice industry, the big banks and retail funds have accepted the need to end commissions, and tried to get in first with a half-baked transition to fees in 2009. Financial planners, however, have continued to fight to the death on the issue, despite the long lead time before the model of direct fee-based, best interests advice is fully established. The planners may yet seek to overturn key aspects of the FOFA legislation, exploiting the Coalition’s deliberate unwillingness to consider financial planning and superannuation as anything other than a feeding trough for planners and retail funds. Mathias Cormann quickly issued a press release this morning condemning opt-in and the banning of commissions. Financial planners will see that as an opportunity to derail the reforms if they can convince a cross-bencher that the reforms are a threat to them.
David Whiteley, of the Super Industry Network, emphasised the “carefully calibrated” nature of the Shorten package. “This is a moderate package — it increases consumer protection, both broadly in terms of issues like commission, and in detail, in areas like opt-in, but at the same time it’s generous to the financial planning industry with the prospectivity,” he told Crikey. “It protects consumers, retains a viable industry and allows financial planning to become a profession.”
The FPA itself held its fire, saying in a media release it wanted to see further detail but acknowledging Shorten’s efforts to consult. It repeated that opt-in was “not our preferred outcome and the FPA does not believe that opt-in should be legislated, but awaits the detail in the draft legislation …”
Don’t forget the long-term context for these reforms. The push emerged following scandals such as Storm and Westpoint. Failure to reform effectively now guarantees there’ll be a repeat of those debacles in a few years.
Shadow Financial Services Minister Mathias Cormann supports ‘in principle the proposed “statutory best interests duty” for financial advisers, subject to seeing the detail in the legislation. He opposes the opt in requirement as being ‘unnecessary red tape, increasing costs for both small business financial advisers and for their clients’.
Thanks Bernard
Thankyou for your insightful knowledge about how the system of how the giving financial advice works.
Your opinions are so helpful.
Banning commissions would not stop me in the slightest bit if (that’s a big massive IF) I wanted to recommend a strategy like what was recommend to the clients of Storm financial. By the way, Bernard I believe they were charged a “fee for service”.
I can bet that you have never received advice in any form from a financial adviser??
Nowhere, no study, no academic anywhere has said this is connected with commissions.
What about commissions on real estate for agents???? Does that mean if property values fall 50% will they be caused by their commissions??
Yay for the union backed industry funds – apparently they win – yay!!!!! I love you Whiteley – love your mate Bernard.
Slightly disingenious rebuttal the (not so) intelligent investor.
The restriction on commissions is to prevent the situation currently where a duty of care is in danger of being breached to the investor by the fact that in the absence of a direct fee the advisor will (looking after their own interest) recommend perhaps a slightly worse product with a better advisor commission.
Another situation that happened recently was requiring supposedly independent advisors to ‘book’ a certain volume of Commonwealth bank portfolios to clients annually in order to retain certification’s or continue to be able to sell the product and retain ‘preferred advisor’ status. This type of arrangement could also influence the independence of advisors who at the end of the month might need to book 5 CommBank portfolios to retain their quote / preferred advisor status.
Comparing with real estate agents is a false analogy as there is in almost all cases only one product and the commission paid by the seller is negotiated up front.
If you had said buyers agents you may have a modicum of a point but then again I am not aware of private sellers offering commissions to buyers agents in the same way to recommend real estate as financial institutions do with financial products to advisors.
I think the legislation is a good first step. The opportunity for a conflict of interest here is fairly obvious.
Since most advisers are “owned” by major dealer groups and fund manager / product developers, your comments, although very informative, have NO EFFECT on fees or commissions. For many years some dealer groups and even independent advisers have adopted a fee only approach. This approach often charges fees grossly in excess of commissions and are encouraged by the regulators as acceptable business models. Are we debating commissions v fees or more importantly the amount of money actually paid by the consumer?
No COFPINFO the debate that Bernard, who likes to grandstand from his so-called position of purveyor-of-the-peoples-interest, high and almighty free-speech-press-baron is that any sort of commission caused financial disasters like Strom.
What complete rubbish.
I shot that one to pieces. With fee for service I could still recommend ANY product scheme or otherwise regardless of commission or not.
“Risk is something you get – when you don’t know what your doing” Warren E Buffett.
Re- read his last paragraph.
He knows NOTHING of the financial planning industry therefore should not pretend inflate his journalistic ego by giving his “opinion” about it.
The Union (and Bernard) loving Industry super fund network spends $70 million dollars a year of fund members money telling us how good they really are.
I love you David Whiteley. Love Bernard.