A new year’s fizzer
The start of the financial year brings a melting pot of pros and cons, from higher super contributions to the nebulous FOFA plan, writes David Potts.
We financial types get to celebrate New Year’s Eve twice, except this won’t be as good as the one six months ago.
Mind you, the financial year which begins on Monday will be breaking new ground thanks to sweeping changes in the rules.
Some are positive: your boss will be paying 0.25 per cent more into your super, and anybody over 60 still working can salary sacrifice up to $35,000 – another $10,000 – into their fund.
Best of all, low-cost MySuper starts with funds offered by ANZ, BT and CBA adjusting your investments as you get older – to less risk, more cash – so you never have to worry about it.
But many people aren’t being invited to the party. Self-funded retirees, for example, will have to take out a higher minimum pension, though under the bizarre super laws, many will be able to put back in what they don’t need.
Did you prepay your private health insurance to crib the rebate for another year? Smart move, but don’t forget that your premiums will shoot up this financial year and you might not be getting the means-tested rebate any more.
And this will be the first financial year in yonks in which there are no income-tax cuts.
But it’s the upheaval in financial planning, which the government calls the ‘‘Future of Financial Advice’’, known as FOFA – not to be confused with FIFA or the Socceroos – that will characterise 2013-14.
The official website says the rules will produce ‘‘better-quality advice’’, ‘‘a reduction in product fees’’ and ‘‘less [sic] rogue advisers in the industry’’.
That’s one in three right. Managed funds have been reducing their fees – most no longer have an entry fee, for instance – but you usually have to go through an adviser to get one, which is the catch.
Advisers can no longer claim commissions from managed funds – or product manufacturers, as the government calls them – which had given the false impression that you were getting free advice.
From July 1, they’ll have to charge new customers direct. Incidentally, they can still claim commissions on anything they sold before then, though they have to be more upfront in telling you about them. So whether you’re going to be better off, setting aside the question of the quality of what you’re being told, depends on how the fee for service compares with the missing commission.
The fee can either be hourly, a retainer, or a percentage of the value of investments.
No longer will any adviser be tainted by commission-driven financial sales people, the government argues.
Not so fast.
It’s true advisers will have to take ‘‘reasonable steps’’ to act in your ‘‘best interests’’. Unbelievably, that wasn’t the case before.
The thing is, although they must go through the bureaucratic motions, there’s nothing about having to give the correct advice. It just has to look honest, or at least not self-serving.
‘‘The offence is for not doing it, not for getting it wrong,’’ is how Gadens Lawyers senior partner Jon Denovan describes it.
So is all this a triumph of process over results?
‘‘The ASIC guidance is that advisers will be expected to give advice that ‘is likely to leave the client better off’, rather than just the same, and certainly not worse off,’’ says NAB executive general manager of wealth advice, John Flavell.
The bank owns Godfrey Pembroke, which since 2006 has been handing back commissions to its clients and charging a fee for service.
‘‘There are costs associated in meeting the new regulatory obligations,’’ Flavell says. ‘‘But it’s a superior outcome for consumers. I expect more will seek advice. Typically, people seek advice later on but this will be a catalyst for seeking advice earlier on.’’
Others aren’t so sure.
After all, commissions will still exist, only under a different name.
In an email to advisers late last year, a major annuity provider said ‘‘earn revenue for your time from the FOFA-friendly upfront adviser service fee of 3.3 per cent, amortised over the long duration of the product and option for ongoing fees also.’’ The ‘‘adviser service fee’’ replaces a commission of exactly the same amount.
If advisers pushed a product on to somebody who didn’t need it for a commission before, but in future will get a percentage fee of the same amount instead, what’s the difference?
The going rate for a statement of advice, as advisers’ recommendations are now called, is supposed to be about $2400.
But an adviser at a medium-size planning firm admitted that would incur a loss without ‘‘placement’’ or ‘‘implementation’’ fees from selling a managed fund.
Since they’re percentage-based, and perfectly legal under FIFA – oops, FOFA – the more you put in a managed fund, the more your adviser gets.
Then there are trails that are continuing commissions to an adviser for signing you up to a fund.
These used to be hidden, even though they came at a cost to your returns.
These will have to be declared annually in letters from advisers to their clients, and are certainly harder to justify under FOFA, but aren’t banned entirely.
It boils down to whether they’re a ‘‘truly deferred payment or really a top-up’’, Vicki Grey, a compliance partner with Gadens Lawyers, says.
So long as you know about them, trails aren’t necessarily a bad thing because they can spread the upfront cost of investment advice. The bigger worry is how the big banks, AMP, Macquarie and IOOF have a stranglehold over the financial planning industry, which FOFA exacerbates.
An insider at one of them says the products they sell, not the services the adviser provides, is where the money is made. This won’t change quickly under FOFA.
‘‘The bank doesn’t make money unless a product is involved. Nothing will change while the advice industry is owned by the product suppliers,’’ the adviser warns. Yet the most telling criticism of FOFA is that it wouldn’t have prevented Storm Financial collapsing and wiping out the nest eggs of thousands of investors. They weren’t the victims of conflicted advice caused by commissions paid to the adviser.
On the contrary, many paid a hefty fee for service while the adviser claimed only a small trailing or annual commission.
The problem was dud advice involving excessive borrowings, though there was also an overly cosy relationship between lenders and Storm’s troopers – oops, advisers.
‘‘FOFA wouldn’t have changed what went on in Storm,’’ Wealth Within co-founder Dale Gilham says.
Much will depend on how forceful ASIC is following its poor track record over Storm Financial and its tardiness in banning a crooked adviser at CBA.
Gilham is even more scathing of the takeovers that FOFA has triggered that have turned the financial-planning industry into another banking oligopoly.
Say you go to an adviser whose firm is owned by bank A and he recommends you take money out of a term deposit and put it in a bond fund. The choice comes down to bank A’s version or non-bank B’s.
The adviser might say, ‘‘I’ve just spent some time with the team upstairs and they blew my socks off.’’ So bank A’s product it is.
The adviser gets his fee, it’s all above board, and he’ll be in line for the next bonus.
Such is the structure of the industry that FOFA has encouraged with its overlay of regulations and red tape with which small, independent operators have little hope of competing.
‘‘Industry consolidation isn’t good for the mums and dads,’’ Gilham says. ‘‘There’s a need to separate advisers from investment managers.’’
FOFA will reduce rather than increase competition, he warns. Mind you, a big problem is that we don’t know good advice when we hear it.
The last time ASIC sent out volunteers to see randomly selected planners for advice, they only took it if they liked what they heard. One volunteer who wanted to retire early even rated being told to pay off the mortgage first as bad advice. At least shonky property spruikers will no longer be allowed to call themselves advisers or planners, but otherwise it’s business as usual.
The same goes for mortgage brokers who can take a commission for signing you up for, say, a $500,000 mortgage without running foul of FOFA.
What the FOFA?
The future of financial advice (FOFA) reforms beginning on July 1, are:
Advisers must work in your ‘‘best interests’’, not their own. (Previously they just had to give ‘‘appropriate’’ advice, which could be compromised.)
Ban on commissions paid to advisers by managed funds and margin-loan lenders.
Remuneration must be an hourly fee, a retainer or based on a percentage of money invested.
Borrowings cannot be used to inflate the percentage fee from money invested.
Advisers must send an annual statement to clients specifying their fees and what they did to earn them.
Advisers must seek approval every two years to keep charging fees. Super funds can give limited advice for a fee.
Spend to save
Would you pay $9000 a year for top-quality financial advice?
Ceinwen Kirk-Lennox doesn’t bat an eyelid when forking out $750 a month.
For this, her adviser looks after her super and all other finances. Oh, and his fee is tax deductible.
‘‘For that he’s on call – it’s like having an in-house adviser,’’ Ceinwen, who owns a property consultancy, says. ‘‘If you use an adviser correctly, you get a lot out of it. We’ve got that value back again and again. We’ve had great returns and didn’t suffer from the GFC either.’’
Ceinwen, who is in her early 50s, first saw her adviser, Godfrey Pembroke’s Sean Abbott, 10 years ago when she needed to get advice after leaving her job at Lend Lease, which had a defined benefits plan she couldn’t roll into super.
She’s been paying him a service fee ever since.
Unlike many investors who have had a financial product foisted upon them that pays a commission to an adviser who they never see again, Ceinwen and husband Richard meet with Abbott at least twice a year.
Ceinwen much prefers having an upfront fee.
‘‘I like having no silent fees or commissions,’’ she says. ‘‘To me, they don’t indicate integrity.’’
In fact, they are more powerful than commissions. ‘‘If we walk, our fees walk,’’ Ceinwen says. ‘‘Sean has to keep us happy, which he does.’’
Financial planners don’t charge for the first meeting with potential clients.
Ceinwen spent more than an hour with Abbott at their first encounter, which sounds pretty gruelling.
‘‘You need to sit down with someone and tell them what you want to achieve,’’ she says. ‘‘Your finances have to be integrated. It can be confronting, but it’s essential.’’