Sent: 15-02-2011 11:50:58
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The Opt-in Controversy
This week will be about some aspects of the Government's Future of Financial Advice changes.
Most people like to refer to these amendments as "reforms" but my Oxford Dictionary defines it thus - "make changes in (something, especially an institution or practice) in order to improve it".
In reality the Government runs the risk of FoFA merely being changes that bring about negligible reform just like all other previous regulatory efforts to reform the financial advice sector.
This was brought home to me last week when a broadcast email arrived from WA based financial planner I have known for many years.
The planner said he had just signed a "no opt-in online petition" and encouraged me to sign it.
Instead of doing what I was asked to do I sent an email to the adviser which included the following,
Most professionals get paid by submitting an invoice.
Financial planners talk about being professional but don't seem to want to be paid like other professionals. What is so special about financial planners and the work that they do that they have to assume that they have a never ending relationship with a client?
We both know many older financial planning businesses survive on trail commissions paid on client accounts where the adviser cannot remember what the client looks like (and in many cases might have never even met the client).
His reply agreed with me final paragraph. He said, ."The sooner the 'trail for nothing' disappears from the financial planning universe, the better."
But in relation to the rest of my email he said the following:
... a lot of modern professionals (accountants and lawyers) see the wisdom and advantages of being on a retainer.THEY don't have to ask the client to opt in every year, so why should planners be different? ...Imagine a scenario in which, when the renewal is due, the client is on a three month overseas holiday.Is it reasonable to expect that,1. My fees automatically turn off, and2. His account no longer gets manageduntil I am able to get him sign up again for that which we both wanted to continue indefinitely?Unfortunately, as all-too-often when it comes to financial planning, the focus is on the lowest common denominator.My clients already can't believe the stupidity of AML/CTF, new FSGs all the time for the most minor change, etc.This just adds yet another layer of unnecessary paperwork and cost (and, as always, the messenger gets shot).
On the face of it not a bad response most of might think.
There's nothing wrong with a retainer for work performed. The argument for trail commission is that it's a payment for services provided. The biggest problem is that there is no obligation on a planner or their advisory group to actually perform this work.
Moreover, as is well known, if an investor says they no longer want the trail commission paid most fund managers and platforms will still deduct the fee and keep it for themselves.
If the regular opt-in requirement came in what about clients not getting regular services because they've gone away and hence don't get their regular check-up or service? Funnily enough this happens in most areas of the economy - dentistry, medical, estate planning, lawn mowing, home delivered newspapers, etc.
I agree the legal layers of financial advice are too deep and prescriptive. But ask yourself why.
Would you trust a doctor who said they were going to receive an ongoing payment from Pfizer for the Lipitor he was about to prescribe for you? Oddly if such an arrangement existed the doctor would presumably only get paid if the patient purchased the medicine whereas in many financial services investment arrangements the adviser gets paid regardless of the adviser's or investor's actions.
I asked Robert MC Brown about this issue. His views about commissions are well known. He said:
FOFA is merely the government reacting to pressure from the community to do something about an industry that the community doesn't trust. Whether that's fair or not doesn't matter.If only we had self-regulated years ago to rid ourselves of remuneration-driven conflicts of interest, none of this FOFA nonsense would have happened. However, since we've not been willing to do the job ourselves (thanks to our ingrained culture and the power of institutions over the financial planning industry), we are now facing more and more highly prescriptive compliance-based legislation.What else can frustrated government's do if a so-called profession won't act to genuinely restructure itself?FOFA was totally avoidable. It is a self-inflicted wound! It is not a conspiracy by the forces of darkness. It's simply a demonstration of what happens when an industry doesn't "get it". We are reaping what we've sown over many years.It's not a case of ridding ourselves of a few "bad apples". It's a case of understanding what it really means to be a professional person and acting accordingly. Essentially, it means that the community must trust our motives to act in the public interest at all times and without reservation (and in the client's interests to the extent that the client's interests are consistent with the public interest).That means, we must not act in a position of fundamental conflict of interest. Hence, commissions, asset fees, volume bonuses, soft dollar benefits, performance bonuses (and so on) MUST stop. It's not a case of "the client's choice". It's a case of financial planners setting down an immutable set of ethical principles and sticking to them "come hell or high water". Until that happens, we'll never be accepted as a profession and we will face more and more legislative controls. If we think FOFA is bad, wait for the next edition in five years' time......
Well he would say that wouldn't he you might mutter to yourself (if you made it this far!).
Personally the industry needs to move to self regulation of individual advisers much the same as all other professions. To be frank the dealer group system is a busted flush. It might take a government to react to this.
And finally I regret to say that I haven't signed the no opt-in petition and it's highly unlikely that I will.
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