In the News
Advice Should Be Within Our MeansHerald Sun - 6/1/2009
The need for impartial financial advice has never been greater and yet we are never quite sure how to get advice without being conflicted by commissions or incentives that the planner might receive.
The Financial Planning Association recently recommended fee based remuneration should be the standard model in Australia and Senator Nick Sherry has raised the prospect of banning commission payments from compulsory super contributions.
This means financial planning will finally be encouraged to move away from commission payments. I first raised this prospect at the inaugural FPA conference in 1992. It has been a long road.
A move away from commissions is the key to protecting both consumers and the reputations of financial planners - as taking commissions also raises the question of conflict of interest in the advice given.
Continuing the commission-based regime is unsustainable and is likely only to act as a disincentive to people utilising financial planners. It is important that good advice is taken in relation to retirement and investment decisions.
Not all financial planners are in agreement with the FPA's stance and unfortunately some have threatened to leave the professional body as a result.
Another industry group, the Association of Financial Advisers (AFA) has called on advisers to reject the move on the grounds that it takes away consumers fundamental right to choose.
Their argument is that fees would make financial advice unaffordable for many Australians but this is plainly wrong. If the fee is based on the amount of assets people have to invest and product costs drop without commissions then it will ensure we can afford the advice.
The most important thing for most of us is to be in control of what we pay for advice. Fees would cut the link between the investment product manufacturer and the adviser.
Under the commission-based system, used by many in the retail investment industry, on-going services to a consumer are paid for by the product provider (such as a super fund) for the adviser recommending the product to the consumer.
Commissions are not paid directly by investors so we can not switch them off.
They are paid until we withdraw our funds or we cease our life insurance cover.
Commissions also bundle up several charges which make it difficult for us to understand what component of the amount relates to advice, product, or administration.
Under a separate fee or direct charge model we would be billed directly by the financial planner based on an agreement and we would have control over what we pay.
They are talking about a transition to the new system where planners are only made to charge a fee to new clients. This means that legacy products using old systems, such as life insurances, that are unable to change could remain in place, as long as they make logical arrangements with anyone who stays in them.
Being able to pay our financial planner directly, rather than via third parties wouldn’t cost us any more but it would end the distraction and debate that commission advice can be biased.
It would help in our confidence in the advice we are receiving.
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