The financial planning industry could be forced into some major changes as a result of the government’s response to the financial crisis and the collapse of financial advice firms such as Opes Prime and Storm Financial. ASIC has recommended that the majority of remuneration practices currently used by the financial planning industry be abolished. This includes a ban on upfront and trailing commissions, volume based bonuses, soft-dollar commissions, and fees based on a percentage of funds under management. ASIC has also proposed that financial planners be given a fiduciary duty of care to act in the best interests of their clients in the same way as superannuation trustees must act. It is estimated that more than 95% of financial planners charge some form of asset based fee. This means that their earnings are in no way linked to the amount of time spent servicing a client needs but rather almost purely on the value of their clients’ funds under management (FUM).
The impact of these proposed changes will be enormous. Clients will discover the true cost of the ‘advice’ they have been receiving and will see just how much money their commission based financial planner has been able to milk out of them through these fees and commissions and how big a handbrake the commissions have been on their investment growth – a double whammy – through the loss of compounding. Naturally, the financial planning industry will go into damage control to try to ensure that these changes are minimised, and that their ‘golden goose’ is allowed to keep laying golden eggs.
The financial planning industry has enjoyed a massive cash cow through FUM fee generation from the accounts of time poor and uneducated investors. Investors have genuinely looked to financial planners for solid advice on how to manage their investments including their superannuation. They have looked for a short cut to manage their financial affairs without understanding the full cost.
The idea of someone being paid not for the work that is undertaken but for how much capital is under management is out of sync with the practices of society. You must remember that the basic investor that has exposure to managed funds is also paying their fund manager to grow their capital. Quite simply, there are too many fingers in the pie.
For years I have been encouraging people to become pro-active in the management of their share investing activities to allow them to move away from these commission based management structures and to educate themselves on the benefits of Active Investment. We are aware of investors who have paid up to $15,000 ($5,000 is a typical fee) for an initial Financial Plan which could almost be classed as a generic document. Other than the name and address, the other information in a Financial Plan document from a particular financial planner or firm is very similar. From the proposed list of managed funds in which to invest to an asset pie chart and the fee structure table the documents are almost identical. I have personally viewed multiple financial planning documents to be able to state this. I have no problem with a reasonable fee being charged for services based on time and expertise but there should be no link to the amount of funds under management.
One of the main reasons behind the similarity of Financial Plans is that trail fee based financial planners tend to limit their clients into the same funds that pay the planner a high commission and ongoing trail fee and / or have “jollied” them at exotic places. A conflict of interest undoutedly exists but for whatever reason investors grew to accept this as an industry standard. Until the GFC……
To quote Sally Patten of the Australian Financial Review, “it’s not just the financial planners that these new laws will affect. The major wealth firms, including the investment arms of the banks are poised to lobby the federal government to minimise any new investor-protection laws”. With financial planners filling the coffers of some of Australia’s largest funds and investment institutions their profits and processes will surely be affected if these laws come into effect.
The changes being proposed by ASIC will go a long way towards cleaning up the financial planning industry by allowing the clients to see what they are really being charged. Furthermore, the question begs whether the financial planning industry will be able to survive in its current form and, if so, whether many financial planners could be bothered putting up with revised compliance processes for far less income that is severely restricted to a time based fee that is nowhere near as scalable as they have enjoyed for many years. In short, the rivers of money that have been flowing from these asset based commissions will dry up if these proposed changes take effect and the really good financial planners will be able to differentiate themselves through how good their financial planning expertise is not by how good they are are at selling and networking.
It is ironic that in the 1980’s and 1990’s the government, through ASIC, built up the financial planning industry as a private sector compliance buffer in an attempt to prevent from occurring what has actually happened over the last 18 months with the likes of Storm Financial and many others. ASIC saw the financial planning industry as a middle ground between the investor and institution to protect the investor but the institutions saw the financial planner as a marketer of their funds or distribution arm to attract money under management. Now the government, through ASIC, is looking at pulling apart what they created to prevent a Storm Financial type scenario occurring again. It took the GFC to energise action to be taken despite many people over many years trying to publicise what was really going on. Finally it may be happening. But don’t hold your breathe; with so much at stake, expect a huge fight from the industry. In fact, testimony to how much they stand to lose as an industry will be the size of the fight that they put up.
As always, as another way of overcoming a bad experience, I urge you to become educated and learn the skills required to actively manage your own financial destiny. More and more people are waking up to the fact that they have been taken for a massive ride by the FUM commission based financial planning industry, and are learning that they can actively and positively manage their own financial destiny through the use of appropriate tools and coaching. The SPA3 system is one such tool.