AMP Explains

ASIC might be feeling chuffed about tackling AMP '” a bastion of Australia’s finance industry '” over dodgy financial planning behaviour, but it has barely scratched the surface.

We have been waiting for the other shoe to drop on the financial planning scandal ever since ASIC’s “shadow shopping” exercise showed at least a third of clients were being ripped off when commission-based financial planners advised them to switch super funds. What happened yesterday, with AMP Financial Planning (AMPFP) agreeing to an enforceable undertaking over the behaviour of its planners, isn’t that other shoe '¦ it’s just a sock.

If you read the interview I conducted this morning with AMPFP managing director Craig Dunn, you might form the opinion that AMP is spinning hard to limit the damage to its reputation and business model by claiming the main problem was just a matter of paperwork: 45% of planners did not give provide clients with written reasonable advice for recommending they change their super funds.

Under the deal with ASIC, only the 7000 AMPFP customers who switched their super funds (and, surprise surprise, very nearly all of those switches were to AMP products or AMP platforms) will have their advice reviewed. Some of these 7000 customers may be compensated. The other 99% of customers who were overwhelmingly (93%) tipped into AMP products or the AMP platform in the first place will just have to start thinking for themselves.

Further, AMP manages to limit its responsibility to providing “appropriate” advice, not the best possible advice. Is that enough to instil confidence? I suspect not.

AMP is not alone in this scandal; it was just a big, obvious target for ASIC. As long as the industry continues to hug the moral hazard of financial planners receiving commission-based income '” a significant proportion of financial planners will not do the very best they can for clients.

Most AMP financial planners are good people who won’t rip off clients by tipping them out of a well-performed, low-fee no-commission industry fund into something with high fees and various charges just because they’ll cop a commission, but some will. And the way AMP is happy to play the game, unsophisticated clients who need advice have no way of knowing which type they’re dealing with.

This is an edited version of the interview

Michael Pascoe: What have your AMP financial planners done wrong?

Craig Dunn: What AMP financial planning hasn’t gotten right is that our processes around disclosing a reasonable basis of advice '” that is, when we go out and give advice to a customer and explain why the advice is appropriate given their personal circumstances '” hasn’t been adequately disclosed and that’s the major issue that’s come out of the ASIC review.

So you’re saying the only thing your people have done wrong is that they didn’t give adequate reasons when they swapped customers out of low-fee, no-commission industry funds into AMP super products.

What I’m saying is that the major issue that came through from the review '” and I’m not defending it '” it’s inappropriate and we should have got it right and I’m sorry that it’s happened.'” is that we didn’t get good disclosure on a reasonable basis for advice. I’m satisfied that even where we didn’t give that disclosure, in many instances the advice was still appropriate. However '¦

Do you think there’s a difference between appropriate and good or the best possible advice?

My definition of appropriate is that we give advice given the client’s personal goals and objectives in life. And can I say, Michael, that coming to your earlier point, there will be instances where we didn’t get the advice wrong for our customer, and I’m not shying away from that; and instead I’m disappointed that that’s happened and I’m sorry we’re going to give them the opportunity to have that advice reviewed. That review will be independently reviewed by an external expert and then if it’s proven that we haven’t done the right thing by the customer, we’ll give them the opportunity to take their money and move it back to a fund of their choice and we’ll refund the cost of advice, fees and charges, exit fees, etc.

About 93% of new investment or superannuation business resulting from AMP planners was invested in AMP platforms or products. Now do you think that’s the best advice?

Well let me explain what that 93% means and I also want to talk about why customers come to AMP in the first instance. In the platform that we recommend, there are 20 fund managers that can be chosen by the customer with their planner. There is no bias in the planners’ remuneration.

There is no bias because of commission payments, that some pay commission and some don’t?

There is no bias in the choice of fund manager within the platform. Those 20 fund managers who, I might say, are the same fund managers that industry funds use '” there is no bias in the planners’ recommendation of those fund managers whatsoever.

Are there non-commission-paying alternatives?

On that platform there are fund managers who are paid fees for managing the money. In terms of the broader remuneration of planners, our planners can offer a commission-based remuneration. They can offer a fee-for-service based remuneration. We’re not pro-commission, we’re not pro-fee for service. We’re pro choice.

They (customers) can make their own assessment and judgement whether they’re getting value for money.

ASIC found that (the choice) wasn’t always disclosed. The other question is AMP is distancing itself from is what the planners decide on a commission or non-commission basis. The reality of the structure: doesn’t it provide a moral hazard, particularly when you’ve got a buyout retirement plan for financial planners, which encourages them '” pays them more '” if they’ve been using AMP products?

ASIC’s concern '” and it’s a genuine concern and it’s the right concern '” is that notwithstanding the nature of the planner remuneration or the product selection that’s available for the client, what the law requires, and rightly so, is that a planner discloses and demonstrates why the advice that has been given to the client is reasonable and makes sense given their personal circumstances.

So it doesn’t have to be good advice, it doesn’t have to be the best advice '” it just has to be reasonable and disclosed?

The advice needs to be reasonable '¦ given the client’s personal circumstances and given the objectives and goals that they’ve got financially and in their broader life, that when they sit down with an AMP planner '¦ will the client be better off as a result?

Better off than what? Better off than doing nothing or better off with an alternative?

It will be better off given their circumstances had they not gone to the planner.

Can I put a specific example to you? A customer goes to a financial planner. A customer is in an industry fund paying very low fees. The industry fund is a top-performing investor. If the financial planner advises and encourages that customer to swap out of that fund into an AMP product that pays commission, that has higher fees, that demonstrably because of the higher fees isn’t going to do as well as the industry fund '¦ do you think that’s crooked.

In the example you’ve given, if a client goes and see a financial planner and as a consequence of making the recommendation you suggest that client is worse off or not as well off, then that would be poor advice.

Do you think that happens?

I’m sure it’s fine. That has happened and that’s why we’re going through a process to make sure that if it has happened we rectify it because we wouldn’t accept that as a standard.

Well, ASIC’s shadow shopping survey (an earlier report into financial planning standards) didn’t spell out which firms but they found it happened a lot. They found it happened perhaps as much as 30% of the time when a financial planner is operating on a commission basis. What do you think the percentage is within AMP?

What we find actually, Michael, is for many people in the circumstances you’ve described '” they’re under-insured, they’re not taking advantage of the Government’s co-contribution scheme, they don’t have disciplined saving, they’re not structuring the saving they do in a tax-effective way so we find very often that '” putting the product recommendations to one side '” that planners can add a lot of value to the circumstances you describe. If they were not to do that and simply provide a product recommendation, that is wrong and it should not happen.

So there’s strategic advice that adds value and helps the client but along the way they could be shafted on what fund they go into. Don’t you think that’s a '¦ let me put it another '¦

Well I’m not sure what you mean by moral hazard. I’m explaining to you that in an individual circumstance what I think constitutes good advice and what I think it means will enable a client to be better off as a consequence of that advice.

What percentage of your financial planners operate on a commission basis compared to a fees and a total rebated commission basis? Including trailing commissions?

Like most of the industry, the majority of our planners would earn their income through trailing commissions and I expect that’s true for most of the industry, but again '¦

When you say most '¦ What percentage? You must know that.

Well the great majority, Michael. I don’t have '¦

Ninety-five, 99 percent?

I don’t know what the number is but the majority, the great majority, of AMP planners '” like most planners in the industry '” would have their remuneration driven by commissions and I don’t think that’s something that is necessarily of great concern. I don’t think necessarily that one form of remuneration is better than another.

Do you think AMP has been unfairly singled out here '¦ that the problems you’ve got with ASIC are actually industry wide and common?

I think that’s a better question to direct at the regulator. My focus right now is AMP and let me be very clear we are found to have some deficiencies in some instances and clearly we have not got it right. That is very disappointing. It’s not appropriate and we need to fix it and that’s what we’re doing.

I just want to get something clear here. The impression I got from you is that a financial planner might tip a client into an AMP product where the fees are higher compared with a low-fee industry fund but that’s OK because the planner will add some other value with advice and insurance to make up for that deficiency. That’s the impression I’m getting from what you’re saying.

What I’m saying is that each circumstance needs to be judged on its own merits and you’re singling the service we offer down to be the product and your definition of what is the best product may not be the client’s definition, Michael. The fees that we charge on our product might be higher than an industry fund, that’s true, but the client might be saying actually I want to deal with a institution that is financially well backed by capital. It’s a large financial institution and that’s more important to me than dealing with a lower-price product. I mean, some people buy a certain motor vehicle. Other people buy another type of motor vehicle. Judgement about what’s best or what’s highest quality is the judgement a customer makes. And the example you keep coming back is that all customers are suited by a particular type of product.

So you don’t think your quality is compromised by having a sales force which is demonstrably influenced by commissions when recommending products?

I’ve told you. I think there are pros and cons with any form of remuneration.

That’s a cop out by AMP isn’t it? What would be best for AMP, what would be best for its reputation, what do you think would be best for customers?

I think the best thing for customers is what I’ve said, is that they know that when they come in and see a planner whether it’s an AMP planner or otherwise, that as a consequence of that experience, both in terms of financial strategy and the products recommended, that they’re better off as a consequence.

Should all AMP customers now review their investment superannuation plans to see if in fact they’d be better off not having AMP products. Is that implicit in the ASIC undertakings?

We’re going to write to the customers that have been impacted by this.

Only 1%. The rest of the customers haven’t been swapped.

Michael, the examples that have been selected by ASIC '” they picked files where advice had been recommended to move a superannuation product. That’s the very point of your question. This is 1% of our business activity. Now I’m not saying that it’s OK. And I’m sorry and I’m disappointed in terms of what’s happened but it’s 1% of our business activity.