Advice debate to heat up
THE financial planning industry is bracing itself for a wave of criticism and regulatory reform.
Next week the first of a number of inquiries and reviews – the parliamentary joint committee inquiring into financial products and services chaired by Bernie Ripoli -will hand down its findings. One of its terms of reference is the role of financial advisers and following the collapse of groups like Storm Financial and Opes Prime there will be particular focus on commission arrangements and product sales.
Given the evidence presented to the public hearings so far no-one in the financial planning industry will be surprised if the findings are damning of certain industry practices and standards of behavior.
There is no doubt the tide of industry opinion is turning strongly. That was exemplified this week by a number of Australia's leading super funds – including all the major players like AMP, Axa, BT, Colonial First State, ING, Macquarie and MLC – formally endorsed a new charter for super fund members that will clearly separate fees for financial advice that members pay for their superannuation.
Appearing on the ABC television program Inside Business at the weekend Bernie Ripoli was asked if he believed commissions ought to be banned. While clearly not wanting to pre-empt the inquiry's findings he made the strong point that quality of advice was a bigger issue than the payment structure.
He flagged the need for higher education standards – something that regulators in the UK have already moved on – and a greater technical understanding of products like margin loans and the impacts of strategies involving high levels of borrowing which have been illustrated in devastating ways by various Storm clients.
There are around 15,000 financial advisers in Australia. The majority of them are honest, hard working and professional people. But as always a small percentage of bad apples can pollute an industry's reputation.
Ripoli is correct to say that the quality of advice is the first order issue. However, payment structures that are complex and opaque between product manufacturer and advisory dealer group either distort or at least create the perception of distortion.
Either way investors and advisers are not definitively sitting on the same side of the table when selecting investment products. The payments between manufacturer and dealer groups also mean that investors often do not fully understand the value of the advice they are receiving.
By rolling at least part of the fees for the advice service into the product offer it is not surprising that investors often do not clearly understand what they are paying in advice fees nor fully appreciate the value.
Make no mistake – good financial advice is worth paying for. The complexity of our tax and superannuation systems means that for many people getting advice around the right structures and strategies is required and will more than pay for itself. Stay tuned for the report due in June next year from the Cooper Review of our super system to see how the structural complexity of our super system will be addressed.
What will be interesting with the Ripoli report next week will be to see where the committee comes down on the issue of an adviser's fiduciary responsibility to clients.
The Australian Securities and Investments Commission (ASIC) proposed in its submission to the Ripoli inquiry that the introduction of a fiduciary standard ought to be considered as a way of clarifying the role of advisers.
That would mean that where there is a conflict of interest between an adviser's interests and a client's interest – the clients interests must take priority.
Today advisers must have a reasonable basis to recommend a particular investment. In some ways this is a subtle change and many advisers would argue with absolute conviction that they operate that way today. But by enshrining that in legislation it may draw the line in the sand that the advisory industry needs to rebuild public trust and confidence.
For more information visit www.vanguard.com.au.