The Australian government is moving to remove the distorting influence of commission based payments to financial planners. Following a series of scandals in the industry, in particular the losses associated with the collapse of Storm Financial, the government commissioned a report, the Ripoll Report, and is now proposing to put its recommendations into law.
The government proposals cover a number of areas including imposing a statutory fiduciary duty on planners to act in the best interests of their clients, a review of the professional standards of planners, and an improvement in the disclosure elements in Financial Services Guides.
However, like in the UK, it is the removal of commissions that is causing the furore among the planner community. The proposals are for a fee agreement directly between planner and client prior to the sale and the clear disclosure in dollar terms of the total advice cost. Ongoing fees must be agreed with the client and the agreement must be renewed annually. For the moment, the proposals only apply to investment products with risk products specifically excluded.
This is very similar to the approach being taken by the FSA in the UK with their Retail Distribution Review programme. Both the UK and Australia are intending to bring in these changes by 2012.
But while worthy in themselves, in terms of changing adviser behaviour and removing the distorting effect of commissions on advice given, neither proposal deals with the fact that the end result will be to move advice out of the affordable price range of the average saver. So while the wealthy get better advice, those who have less to invest and are generally less financially educated, are left to make their decisions themselves. The Minister for Financial Services, Chris Bowen, has admitted as much when he stated that ‘some people will leave the financial planning industry as a result’.
If the financial planner sector decreases in size, it will reduce competition, making it more difficult and more expensive for investors to get advice. And extra cost is about to be put on the manufacturers as they have to change their systems to a factory gate pricing approach and to provide more details for compliance measures.
One of the most interesting recommendations in the report was Ripoll’s proposal to make advice fees tax deductible, but the minister appears to be rejecting that approach, saying that it is too ‘expensive and difficult to justify’. This is a pity as it would help tackle they primary weakness of the changes; that they are pricing average investors out of the advice market.
There is further consultation to be held and no doubt some changes will be made to the detail to reflect unease expressed in the industry about the effect of the changes. We must wait and see if this move succeeds in protecting investors from bad advice primarily by excluding them from any advice at all.