Advice squad busted in raid on invisible commissions

Debt Man column – The West Australian (Money)

For: May 17, 2010.

Bruce Brammall

Debt Man

News always travels fast. And while good news moves fast enough, bad news travels like the Millennium Falcon.

In this age of Crackberries and iPhones, you can’t escape bad news anywhere. Not if you leave the office. Not in a noisy pub. Not if you’re busy in a steamy affair with a political opponent.

Not even on foreign soil.

There I was, enjoying some downtime with some bogan and bogette friends in Bali, when the latest thunderbolt struck.

Blackberry in hand, lying in bed, before the kids woke, I got to read about the “fire and brimstone” being rained down on financial advisers.

Commissions and volume kickbacks are being banned! And advisers will have to act under a fiduciary duty! That is, shock horror, they’ll have to put clients’ interests ahead of their own!

Fire and brimstone? No. Overdue. Commissions should have been killed off with shoulder pads in the 80s.

The news had also reached one of my Bintang-appreciating mates. Over the first beer of the day …

“Caught up with the news on financial advisers?” bogan Steve said. “Commissions are banned, mate. Guess your industry is stuffed then, hey.”

The industry isn’t stuffed. But a lot of people working in it probably will be.

When the changes come into force in mid-2012, there will be a lot of financial advisers who quit, retire or will sell their business. One survey suggested one-fifth of advisers would go.

Let’s hope it’s the laziest and the worst 20 per cent of the industry.

I’ve argued here before that it would be great to cull the worst of most industries and professions. Raising any industry standards will achieve that. And – apart from some in the real estate industry who apparently believe none of their number has ever done anything wrong – most people agree with that about their own industry.

Commissions aren’t the devil, per se. Banning commissions is like … like taking away the ability of Jim Carrey’s character to tell porkies in “Liar, Liar”.

“I … can’t … lie!” squealed Carrey’s frustrated character to the judge. It didn’t mean his job couldn’t be done, just that he had to find an honest way of doing it.

The commissions and volume bonuses being banned are generally payments to advisers or licensees that aren’t visible to the end client. It’s the invisibility that’s the problem.

With commissions, what the adviser is paid is generally packaged up in some other fee – usually the super or investment platform fee – but not spelt out. It’s less honest, so it’s rightfully got a stench about it. Why shouldn’t a client know what their adviser is being paid?

What should consumers do, given the changes are two years away?

Consumers should be asking their advisers about other fee structures now, not in 2012.

Ask them if they have a fee-for-service offer, or if they charge an “adviser service fee”, which can be either a percentage or a dollar figure.

Many will also have an hourly rate, just like accountants, lawyers … and prostitutes. Don’t forget Richard Gere, 10 years before paying for Julia Robert’s services in “Pretty Woman”, was himself a male hooker in “American Gigolo”.

Like the Fitzgerald Inquiry or WA Police Royal Commission into bent cops, getting rid of commissions is simply evolution.

But, sadly, financial advice is far less sexy than police work. There will be no “Underbelly” about the seedy side of the financial advice industry.

*****

Buried in the last week’s budget was an admission by Kevin Rudd that his First Home Savers Account was a “Dumb & Dumber” waste of time, even if well meaning.

The rules governing its use meant that simply signing up for it meant you were taking an enormous risk. You had to “save” for at least four years and if you bought a house earlier, your money was forfeited to superannuation.

Thankfully, Rudd has done another double somersault with pike – Greg Louganis style, complete with ignominious head smacking on the board on the way down.

You won’t have to forfeit the money to super anymore. After four years, you can use it to pay down your mortgage.

The previous rules were utter rubbish, as voted by providers and the target market. Now it might actually be worth something.

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au .