(03) 9020 2905It’s been a big and bruising 10 days in the financial services sector.
First, a legislative bomb landed. Then a hand-grenade report was tossed in to finish off the wounded.
So, today I’m reporting from the financial advice frontline in the “war of independence”. It’s chaos out there. Looks more like the aliens from “Independence Day” have landed.
I’m talking about the release of the Future of Financial Advice (FoFA) legislation and the latest, less-than-glowing, shadow-shopping survey from the Australian Securities and Investments Commission.
Key to the reforms in FoFA is a ban on commissions on super and investments and the removal of “volume bonuses”. Both of which are considered “conflicted” remuneration structures that can bias advisers’ recommendations.
And while ASIC’s report was highly critical of the quality of advice given to pre- and post-retirees, they were also critical of conflicted adviser payment options.
Simply, according to FoFA and ASIC, there’s a lot to be fixed in the financial services industry. And not just financial advisers – although they’re the customer-facing staff, as it were.
At the centre of both the FoFA reforms and ASIC’s report is a concern that product manufacturers (banks and life insurers, predominantly) have undue influence over what products advisers recommend to clients. And, further, how those advisers are paid.
That is, most advisers can’t really look outside their box. They are, essentially, the “product distribution arm” of their employers.
Banks and insurers in Australia employ the vast majority of advisers. So, the term “distribution channel” is a demeaning, if somewhat accurate, term for the financial advisers they employ (in the same way that former Fairfax chief executive Fred Hilmer once described journalists as “content providers”).
Former AMP chief executive Andrew Mohl was famous for his belief that ‘When a customer reads an AMP menu, they expect to get AMP food.”
That is, if customers saw an AMP adviser, they expected to be recommended AMP insurance, AMP investments and an AMP platform for their super or investments. (Really? Weren’t they coming in for the best financial advice?)
So, what’s a person in need of financial advice to do?
Well, for a start, when you seek advice, make sure you understand who owns who in the zoo. That is, if you walk in to Bank XYZ, don’t be surprised if you end up being recommended investments owned by Bank XYZ or its subsidiaries.
Understandably, many Australians would prefer advisers from a big brand like the major banks, because they trust the name. There’s nothing wrong with that, except if the advice is tainted by those associations.
If independence is important to you, how do you find at least reasonably independent advisers? (Also be aware that independence is no guarantee of quality.) But here are some questions to ask.
Who “owns” the adviser?
Ask who the adviser’s licensee is. And then ask who ultimately owns the licensee. Ownership structures can be complicated, but if the ultimate owner is a major bank or insurer, get your adviser to explain exactly why he chose those investments over other available investments when you receive your “statement of advice”.
How big is the adviser’s “approved product list”?
Licensees set the list from which their planners can provide advice. The world of products is mindbogglingly big. If the licensee restricts the adviser from using all but a handful of them, or encourages them financially to use certain products that happen to be owned by his licensee … well, you can join the dots.
How is the adviser paid?
While FoFA will ban commissions and volume-related bonuses on investments and super, it’s not compulsory until July 2013. How is your adviser paid? Is it by commission? Adviser service fees? A straight fee-for-service? Or a combination of these? Get them to explain it.
In essence, think of a mortgage. If you walk into an ANZ Bank branch, they’re not going to sell you a NAB loan, even if it happens to be better and cheaper. An independent mortgage broker, however, is likely to be able to look at, potentially, dozens of loans for you.
Financial advice is similar (if considerably more complicated than a mortgage). You have a choice as to whether you want the safety of a big brand or independence.
As always, ask plenty of questions. They shouldn’t be hard for advisers to explain.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au.